Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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.......................................................... 25 Figure 7: Outlet Representation by Mode....................................... 50 Figure 27: Victoria ............................................................ 48 Figure 25: Outlet / Volume Relationship ................................. 35 Figure 16: Monthly Demand vs........................................................................ 53 Figure 28: Vancouver . 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)........................................................................................................................................................................................................................ 45 Figure 22: Petroleum Gross Product Margins ................................................ 62 Figure 33: Ottawa ......................Price History............................................................................................. Income.............................................. 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ... 71 MJ ERVIN & ASSOCIATES i ............................................................... 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ............................. 34 Figure 15: Monthly Rack Prices: Selected Markets ............. 4 Figure 2: 1996 Average Prices/Margins ................1988-1995 .................................................................. 63 Figure 34: Montreal ...... 42 Figure 19: Pump Price ...................................................................Price History........... Pump Price (nominal ¢/litre)...................................................................................................................... 46 Figure 23: Average Annual Throughput per Outlet..... 66 Figure 35: Saint John NB .....................Price History ..... Costs.......................................................................................Price History .................................................................................................... 57 Figure 31: Winnipeg ......................................................................................................... 40 Figure 18: 1995 Average "Blended" Pump Price ...............tax.................Selected Goods & Services .................................................. 24 Figure 5: Canadian Retail Outlet Population .. 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category.......................... 54 Figure 29: Calgary ... 28 Figure 8: Outlet Representation by Service ..Price History.............................................................. 56 Figure 30: Regina ............8¢ Pump Price) ....................................... 69 Figure 36: Halifax ..................................... 16 Figure 3: 1996 Average Regular Gasoline Margins (56.................................................................................Price History .......................Price History .. 70 Figure 37: Charlottetown ........................................................Price History... 44 Figure 21: Gross Marketing Margin Elements ...........Price History ....................................................Price History .............. 43 Figure 20: Ex-Tax Pump Price Elements ................Regular Unleaded ................................................................................................ 36 Figure 17: Study Market Methodology ............................... ex-tax elements ................................................. 30 Figure 10: CPI Index Comparison .......... 24 Figure 6: 1995 Retail Outlets by Province .............. 49 Figure 26: Outlet Revenues............List of Figures Figure 1: Pump Price / Margin Model.......... 29 Figure 9: Annual Gasoline Price (Cents per Litre) ..........................Selected Centres ......................................................Price History............. Gross Product Margin ............................ 58 Figure 32: Toronto ...................................................................................... 33 Figure 13: Monthly Gross Marketing Margins..................Regional & Urban Groupings................................................................................................................................... 47 Figure 24: Outlet Volume vs...........................

........................................ 15 Table 3: Selected Study Markets ...........................List of Tables Table 1: Downstream Sales Channels ................ 1996 ............................................................ 51 MJ ERVIN & ASSOCIATES ii ................................................................................... 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue..................................... 13 Table 2: Taxes on Regular Gasoline on December 31....

and the Canadian Petroleum Products Institute (CPPI). and ex-tax pump prices. the Canadian retail marketing sector realized an average gross product margin of 3.2 ¢ 24.5 cents per litre on the sale of regular gasoline in a typical major urban market.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996.5 ¢ 0. These prices are determined in a competitive marketplace. together with a separate review of the refining sector.1 ¢ 5. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. 1996 Average Prices and Margins . and a foundation for effective policy development. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. supplier costs and profitability. This study.8 ¢ TAX 28.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56.4 ¢ 19. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada. each with unique MJ ERVIN & ASSOCIATES iii . dealer income.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada. rack. represented by crude. Price competition occurs at three distinct levels in this industry.3 ¢ 28.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. Natural Resources Canada (NRCan).

Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. While each of these marketing channels operates in a competitive environment. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. and declined by 10 cents per litre measured in constant dollars. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. the responsibility for deciding upon retail pump prices resides principally at the local dealer level.000 in 1989. Convenience store. this study focuses on the retail gasoline sector. car wash. nine of the past ten years. compared to about 22. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). Dealers have a variety of relationships with their supplier. and accordingly. well over half of all outlets in Canada operate as lessees or independents. demand and other competitive factors existing at the time. which potentially allow for reduced margins at the gasoline pump. The resultant margins are therefore a reflection of the state of product supply. and the traditional automotive service bay. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). Approximately 16. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure.dynamics.500 retail outlets were in operation in Canada in 1995. due to its prominence in the public and media domain. are examples of ways in which outlet petroleum sales are augmented by other revenues. From 1986 to 1995.

MJ ERVIN & ASSOCIATES v . As a result of these trends.The “tax-included” nominal pump price increased over this same period.crude) 5¢ Marketing Margin (retail . as a consequence of refinery plant rationalization (closures) and a modest demand increase. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. and has been a result of several factors including: • • • improved refinery utilization and efficiency.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. however. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases. From 1991 to 1996. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. This has both resulted in. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre.

to derive 1995 average petroleum gross product margins for each of the 19 markets. wholesale product cost and freight charges) were isolated from the pump price. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. were selected for a detailed review of outlet economics. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. 19 markets representing a broad range of conditions. With the participation of several CPPI member companies. This was integrated with selected NRCan price data. and one by one. This provided for market-bymarket and regional comparisons of key competitiveness indicators. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé.Comparison of Canada. but also had significantly higher throughputs per outlet. With few exceptions. When petroleum gross product margins were compared to their corresponding outlet throughputs. A wide range of petroleum gross product margins were evident. several “outside variables” (product taxes. MJ ERVIN & ASSOCIATES vi . That such a relationship should exist was not surprising. although this study provides an independent confirmation of this. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. rural markets. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups.

Consequently. of which gross product margin and throughput are only two of several factors. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.000 Volume (litres) 4.000. which reflects his investment in the outlet.6624 1. These costs would include salaries of marketing representatives and management..000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii . not poor competition.000.000. an additional goal of this study was to undertake a comparison of outlet profitabilities.000. sales processing.962 R2 = 0. supplier profit: after the above costs are allocated. and in major vs.000 3. brand advertising. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.000 2.000. and/or distributed to shareholders. and his personal labour investment. smaller markets. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. This study showed that an average outlet net revenue in the 19-market study group was about $70.000.6634Ln(x) + 76. revenues from ancillary operations (eg: convenience store. the residual revenue is available as profit to be re-invested into retail operations.000 6. etc.• Smaller markets performed as competitively as larger centres. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. head office and regional office overheads.000 5. corporate charity.000.

000 $250.000 vs. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers.000) $(150. 1. and that petroleum sales revenues alone. The Canadian retail petroleum products industry. suppliers likely incurred a net loss on outlet operations in 1995.000 $150. respectively.000 $100. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets . at 1995 prices. distant outlets are clearly higher than those associated with concentrated urban markets.000) $(250. Average Outlet Income (before marketing overhead costs) BC/PR $300. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations.$154.000) $(300.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. after allowing for estimated dealer profit and supplier overhead. Although an objective measure of competitiveness is elusive. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. were insufficient to cover outlet costs.000) $(100.000 per year.market study group. for which this study had no specific data. by all objective measures available to this study. Despite this difference.000) $(350. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations. $61.000) $(200. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii .000 $50.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector.000 $200. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. Also. When plotted against the margin-volume model. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. assuming all other costs were unchanged. based upon an assumed posted rack price. While these economics might appear to place this industry in a position of poor viability. Industry profitability is extremely sensitive to very small changes in pump price. Nevertheless. not excessive profits. When these margins were compared to their corresponding outlet throughputs. this industry sector would have realized profits of unprecedented proportions. Also. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. Outlet throughput is a key determinant of inter-market pump price differences. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. crude costs. had petroleum margins which were commensurate with average outlet throughput for that market. despite the predisposition of many observers to use them as such. That such a relationship should exist was not surprising. but to increases in underlying rack prices. A wide range of petroleum gross product margins were evident within the 19market study group. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . Both the downward trend in margins. 7. regardless of size. virtually all of the 19 study markets exhibited similar levels of competition. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. Thus. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. serve as perhaps the most significant indicators of competitiveness in the downstream industry. Thus. most outlets used in the 19-market study represent major integrated oil companies.• • • improving production efficiency through refinery plant rationalizations (closures). in the long term these fluctuations are likely more reflective of market restorations. Indeed. and in turn. and the associated industry initiatives which are ongoing in nature. these findings clearly show that pump price increases are ultimately linked not to increased profits. Thus. although this study provides comprehensive evidence of this. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. 8. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). if Canadian average pump prices were only one cent higher than they were in 1995. most markets.

Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. This created some economic pressure to sell product at a higher pump price. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. poor outlet throughputs were generally the predominant factor.5 million fewer litres of gasoline than a group A (major centre) station. there are three points to consider: • • In very small markets. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. A full-serve retail gasoline outlet typically employs 3-5 staff. which should. and this study showed that gasoline prices were no exception. reduce pump prices. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. While competitiveness in most smaller markets was shown to be as active as in larger centres. average pump prices were relatively high. the solution would be to encourage some dealers to exit the market. in order to build upon the findings in this study towards a full understanding of the dynamics at work. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. which could actually inhibit competition. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). according to the margin-volume model. In suggesting this approach however. The loss of employment represented by a station closure may be of some concern to smaller communities. more isolated markets are generally higher than in larger centres. thereby improving petroleum volumes and ancillary revenues at the remaining sites. in order to generate sufficient revenue to cover the outlet’s fixed operating costs.product margins than larger markets. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. The costs of most consumer goods in smaller. • • At first glance. it would seem that if local government in smaller markets were interested in lowering pump prices. Smaller. other factors exist which contribute to relatively high margins and prices. 9. isolated markets face particular challenges: although found to be highly competitive. reducing the number of outlets may also reduce the number of competitors. MJ ERVIN & ASSOCIATES xiii .

is both the cause and consequence of increased activity in ancillary operations. Also. the Halifax market. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. that where a healthy competitive climate exists. The federal Competition Bureau for example. and the perceived effect on their markets. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). as it does in the Canadian petroleum marketing sector. car wash. characterized by narrow product margins and relatively flat pump prices. depressed petroleum revenues. Convenience store. The historical record is clear however: since deregulating pump prices. is viewed as an agency which exists to the benefit of industry and consumer alike. Retail ancillary operations are a critical element of petroleum price competition. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. and in turn. MJ ERVIN & ASSOCIATES xiv . is well beyond the scope of this study. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. does not appear to benefit in consumer terms. as marketers find even more innovative ways to attract market share. sometimes below that of outlet operating costs. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues.10. possibly to the detriment of the consumer. As these findings show. direct regulatory interventions may have an adverse effect on competitiveness. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. has seen a decline in pump prices relative to other Canadian markets. are an acceptable limitation on pure competition (Finding 8). Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. and the traditional automotive service bay. many national and local environmental regulations exist for good cause. This study proposes rather. 11. under the current PEI regulatory structure. Charlottetown. and likely others in Nova Scotia. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. This competition then. the degree of price competition in the retail petroleum has in effect. will likely preserve a highly competitive petroleum market. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). and as such.

petroleum marketing competitiveness. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. Public perception measurement. A regular comprehensive competitiveness evaluation. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. and the nature of competitiveness influences. margins and competitiveness factors. using Canadian and foreign selected markets. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives.1. in a simple format designed for consumers and legislators. using Canadian and foreign selected markets. not inhibit. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. 2. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Develop cooperative industry research into marketing sector competitiveness issues. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. Improve public understanding and awareness of competition in the petroleum marketing sector. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. • • MJ ERVIN & ASSOCIATES xv . This should be in the form of a quarterly summary of price trends and related measurements. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. and the converse image held in much of the public domain. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. along the lines of the model used in this study. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets.

Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. and in particular. consumers. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. and issues/opportunities facing such markets. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. MJ ERVIN & ASSOCIATES xvi .• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. using Canadian and foreign selected markets. • * * * Better understanding of this industry. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. and regulators alike. by industry.

. The SCF laid the foundation for supplementary studies..” MJ ERVIN & ASSOCIATES 1 . or petroleum marketing portion of the study. leading to more effective policies and reduced uncertainty for future investment.to analyze the rack to retail market and the market structure for refined petroleum products. region by region across Canada. and MJ Ervin & Associates was selected to undertake the “rack to retail”. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump. Project Objectives The working group established as the primary objective of this study “.. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry..to provide a sound database upon which more effective policy decisions can be made. and regional differences which face the petroleum products retail industry. face a number of challenges: a poor public image. A working group represented by Natural Resources Canada (NRCan).to determine the key factors which drive competitiveness in specific markets. and .Introduction Background Canada’s petroleum refining and marketing sectors. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector.. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry. to name a few..” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. Specific purposes of this study would be: • • • • “.. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions. and in comparison to the Canadian national average and nearby USA markets”.. competitive pressures from US and offshore refiners..to draw comparisons with nearby USA markets. the Canadian Petroleum Products Institute (CPPI). and in the process. In 1995. which comprise the “downstream” oil industry. and Industry Canada was convened to undertake this project. and that issues and challenges be identified so that conclusions and recommendations can be made “.to help the industry cope and to enhance competitiveness..to better understand the competitive opportunities and challenges.. or even communities within the same region. and a challenging array of potential environmental initiatives. including a regional. . ..

The study meets these objectives. undertaken as part of this project to: • make a more detailed examination of price. Ultimately. • Part E: Conclusions and Recommendations summarizes the study findings and. It also relates consumer demand patterns to pump price fluctuations. Supporting data to these charts can be found in Appendix II. or which have a specific meaning in the context of this report. due to the considerable data gathering difficulties that such an approach would entail. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . Unless otherwise stated. The study does provide comparisons with US markets on a national level of detail. and the effect of competitiveness on each subsector. Part D: Selected Market Study presents the findings of a diverse 19-market study. through a multi-faceted approach. presents conclusions and recommendations which arise from the study findings. and a foundation for effective policy development. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. Many of the findings in this report are presented in graphical form. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). Part C: Historical Trend Analysis provides an overview of prices. margins and demand patterns over the past several years. Findings are stated in bold and are summarized in part E of this report. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. in Appendix I. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. from which some important findings are made. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. Specific comparisons of specific Canadian and US consumer markets were not made. and in order to provide insights into the range of competitive dynamics that can exist.

The Canadian Petroleum Products Institute. Environment Canada... Suncor Inc. Imperial Oil Ltd. including Ultramar Canada. Consumers Association of Canada. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. Natural Resources Canada. Finally. assisted in securing the support and participation of member companies in the selected markets phase of the study. and Industry Canada. chaired the steering committee. for their assistance. NRCan. CPPI. Petro-Canada. through Maureen Monaghan and Huguette Montcalm. Shell Canada. and provided critical guidance and feedback at several key stages in the process. facilitated some of the data gathering needs of this study. through Bob Clapp.. Ministère des ressources naturelles du Québec. We gratefully acknowledge these companies. • • Several organizations participated in two key review sessions.• Industry Canada.. and also participated in the steering committee. and Shell Canada. Suncor Inc. Ontario Ministry of Environment and Energy. Petro-Canada. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). and their 481 retail associates whose outlet data was used in our analysis. These included: Canadian Tire Petroleum. MJ ERVIN & ASSOCIATES 3 .

and serves to explain several factors that together determine retail gasoline prices at any given time. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. It is this particular feature of petroleum products . but simply. And. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . These relationships can be modeled. Yet. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. In fact. as they are in Figure 1. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline.price . or taste. the particular quality of gasoline which is of most interest to consumers is not its colour.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. as this study shows. multifaceted industry. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. unlike many consumer products. most Canadians relate to this industry in one specific way: as consumers. texture. its price.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. principally of motor gasoline.

While both perspectives are valid. So defined. margins are squeezed or expanded accordingly. Ultimately however. gross margin represents revenue only. evaluating competitiveness is therefore a partly subjective process. these stakeholder revenues are derived from the revenue from the retail sale. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. A consumer however. Each margin is quantified by its defining prices.Many of the terms introduced and explained in this section are used extensively throughout this study. Before examining each of the model elements. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). Gross margin is simply the difference between two price points. and in fact inextricably related.or margin . From an industry perspective. (implying that the stated margin represents net income or “profit”). but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. any operating expenses must then be considered before making any determination of profits. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. this study’s use of the term relates to gross margin. MJ ERVIN & ASSOCIATES 5 . While this term is often associated with the phrase “profit margin”. consumer perspective.from the total pump revenue. objective measurement for competitiveness. “competitive” may be synonymous with “viable”. an understanding of the term itself is necessary. it is important to define the term “margin”. is more likely to equate the term with “value for money”. each essentially taking a share1 . this study examines competitiveness from the latter.

Since a competitive market effectively limits the price option. if market conditions allow a sufficient number of players to remain profitably engaged. reducing costs. Competition can only be sustained therefore. Simply put. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. provide some means for comparing the type and to some extent. Inevitably. To achieve this. and unless care is taken to use the word precisely. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). represents a process by which prices are set.. 1986: “Competition may mean very different things to different people. is the only real option in the long term. An effective functioning of markets also permits smaller competitors to expand if they meet the test. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 .Unlike many business or economic concepts. the degree of competition within a market. or in other words. this usually requires a reasonable number of competitors. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. and the entry of new competitors and new ideas. one must ask how marketers compete. Price competition. as competitors seek to attract market share through lower prices. a universally acceptable definition of competitiveness is elusive. competitors can either restore higher prices or reduce costs. it can frustrate communication and obscure analysis. Technological change and innovation are the large levers of competition in industry. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors.” Price Competition in the Oil Industry In order to assess competitiveness.. Accordingly. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. improving efficiencies. More importantly. in order to maintain some level of brand variety. and ideally many entities offer the same or similar products (brand variety).” “. in the sense in which it is something in the public interest. the result of price competition is reduced profit.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. Conditions for a competitive market can be deemed to exist when: • • more than one. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. The actions by business rivals place an upper limit on the prices a firm can charge for its products. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors.

commonly known as the “marketing mix”1.: Richard D. the raw material from which gasoline is made. is false. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. whose main 1 E. Jerome McCarthy. and Promotion. most Canadians relate more in terms of retail gasoline marketing. which in turn defines a proper market price. and are generally known as integrated oil companies. MJ ERVIN & ASSOCIATES 7 . In fact. particularly in the crude (upstream) industry and refiner sector. Price. the “oil industry” consists of two distinct industries: the upstream industry.. whose main activity is the exploration and development of crude oil. p. the geographic scale of competition is an important consideration. and as will become more evident in this study. (Homewood. or four P’s: Product. • Thus described. Ill.the variables at their disposal. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. so a brief description of these. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. A refiner in Toronto may well compete with a refiner in Buffalo. competition in the crude and rack markets deserves some mention. It is also important to stress that the market ultimately sets rack and retail pump prices. Given the commodity nature of petroleum products. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. the most effective of these as a competitive tool is price. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. and in retail markets. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. Irving. The converse notion that the industry establishes a “should be” margin. and are beyond the scope of this study. 1971). which in turn defines the margins. some organizations have operations in two or more of these markets. 1960) 2 Although distinct. Nevertheless. The dynamics of upstream and refiner competition are major studies in themselves. Within the broad context of the oil industry. and the downstream industry. Place. Basic Marketing: A Managerial Approach.44 (1st Dec. in rack markets. 4th Ed. New York.

It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. Canadian producers have virtually no influence over world crude prices. and the delivery and sale of these products to the consumer. from the exploration for potential crude or gas reserves. which finds and produces crude oil . Within the scope of this study. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. and transportation of crude oil to the refinery plant. MJ ERVIN & ASSOCIATES 8 . Canadian producers must compete to sell their production to refiners. as a minor contributor to the world crude supply. Canadian producers are known as “price takers” rather than “price setters” of crude prices. which it does on a continuous basis. The upstream industry’s crude price is represented in Figure 1 as elastic.activity is the refining of crude oil into petroleum products. that is to say. it is probably sufficient to say that. implying that it fluctuates. drilling. production. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. its marketing operations). which gives an accurate portrayal of month-to-month crude price fluctuations. While this study focuses on the downstream industry (and in particular. gasoline grade. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. in several commodities trading centres around the world. our crude prices rise and fall according to price benchmarks established far beyond our own shores.the raw material from which gasoline is made. and in the open market structure that exists in Canada. Infrastructure The upstream oil industry encompasses a broad range of operations. Crude oil is a commodity which is traded in a global marketplace. Although this industry is not the focus of this study. In providing historical comparisons of crude to rack/pump prices. and refinery production methods. alongside major producing countries such as Saudi Arabia. it is important to examine its relationship with its neighboring downstream industry. due to variables such as crude quality. consequently. rather than a fixed value.

is called the refinery. The focus of this study is on the marketing sector of the downstream petroleum industry. or roughly 34 percent of the pump price. put simply. As is typical of many manufacturing organizations. and numerous safety and environmental safeguards. As a general measure: Finding 2: 1996 average crude price. was 19. is the provincial government. and hopefully realize some production. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. buy refined products from the refiner and sell them to the end-use customer. From this revenue. diesel. and from this feedstock. heating fuels. A modern refinery is a sophisticated work of engineering. as a factor of the regular gasoline retail pump price. MJ ERVIN & ASSOCIATES 9 . maintenance. and marketers who. and some attention to the refiner sector is therefore given here. drill for. who manufacture petroleum products from crude oil. and lubricants. crude is only one of several factors that influence pump prices.While some suggest that the price of gasoline should rise and fall exactly with the crude price. This sector acquires crude oil. in the petroleum sector. day-to-day plant operations are cost-intensive. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however.1 cents per litre. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. and pay out royalties to the resource owner. oil producers must explore for potential reserves. its predominant feature is the plant facility which. involving energy. which in oil producing provinces such as Alberta. personnel. In addition. manufactures a range of refined petroleum products including gasolines.

this model only uses the benchmark crude value. the gross refiner margin is elastic. Of these three refiner prices. In fact. This margin provides for plant operating costs as described above. not the refiner sector. they use rack price as their basis. indicative of a competitive wholesale rack market. In fact the refiner typically pays a higher price than the benchmark crude price. The existence of rack price in a given market is not of itself. since the market-driven rack price provides an objective. being squeezed or expanded between these two price points. some clear competitiveness indicators exist. representing major Canadian population centres. reflecting the cost of transporting the crude from the producing region to the refinery plant. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. While refineries are always rack price points. confidential terms between the seller and specific buyers. Since both crude and rack prices fluctuate according to market forces. which may cause Gross Refiner Margin to be slightly overstated.this is the “internal” price charged by a refiner to the marketing arm of the same company. many of which do not have integral refineries. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. which provides an independent and objective determination of rack-based gross refiner margin. In simple terms. Wholesale volume data is not readily available on a market-specific basis. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. external measurement of the current market value of a particular petroleum product. less the price at which it bought its raw material2 (rack price minus crude price). Canadian refiners produced only sufficient product to supply their own networks of retail facilities. only rack price information is readily available in the public domain. as they relate to negotiated. and a return on the considerable capital investment in the plant facility. For simplicity. contract price . For a competitive rack market to exist. 1 Dealer Price is not included here. which can be broadly categorized as follows1: • • • rack price . rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. as this price point exists within the marketing sector. but with no material effect upon the Gross Product Margin derivation. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. Contract and transfer prices are not openly shared. the gross refiner margin is the price at which the refiner sells its refined product. transfer price . On a national basis however. there would be little or no market-driven competitiveness in the refiner sector. 2 MJ ERVIN & ASSOCIATES 10 .the price charged for immediate supply on an “as available” basis. If for example. and accordingly. the relative competitive strength of any given rack market is difficult to assess. refiners sell their product under a variety of arrangements.Price/Margin Model Elements For simplicity. Although contract and transfer prices are distinct from rack price.

but where pipeline or marine fuel terminal facilities exist. this limits a marketer to a relatively short range (perhaps 1. many US and European refineries are in practice. and which supply petroleum to about one-third of all retail outlets in Canada1. MJ ERVIN & ASSOCIATES 11 . petrochemical producers. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. due to the relatively small transportation cost.for example. or close to. in order to maintain realistic accountabilities within each of the two sub-sectors. In examining the structure of the Canadian refiner sector. or transfer price. 1 Based on Octane Magazine Retail Outlet Survey data. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. to major industrial consumers. In practice. integrated refiner-marketers establish transfer prices at. arises. Canadian refiners must therefore be price competitive not only with each other. market-driven rack prices. potential sources of wholesale product supply for most Canadian non-refiner marketers. the question of the internal selling price. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. The mechanisms that drive rack prices are more fully discussed on page 36. market-driven Rack (wholesale) pricing of petroleum products. who themselves do not refine petroleum products. most refiners also participate in the marketing and retailing of petroleum products. Integrated Refiner-Marketers In Canada. even overseas. who compete for a share of this demand. but at the expense of marketing income. As shown in Figure 15 (page 35). There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. to so-called “independent” petroleum marketers. In these cases of so-called “integrated” refiner-marketers. but with their US and European counterparts. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). as there is no obvious market mechanism to regulate its setting. In practical terms.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . would produce better than expected refiner income. for example. from any one of several regional refiners.000 km) for overland truck transport. wholesale refined product is bought and sold across very large distances. and in the case of gasoline.

farming. and aviation. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. For this reason. as a popular and relevant “window” on the petroleum marketing sector. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. Within this industry sector. Wholesale Sales to a wide variety of customers. home heating. gasoline price and competitiveness issues attract considerable public. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. in the minds of many consumers. It is this sector which has direct contact with the petroleum consumer and it is this sector. Retail Sales to the domestic motorist. trucking. including mining. the most recognized element of the downstream oil industry. each with its own distinct infrastructure. which “sets” the retail price of gasoline. media and regulatory attention. Marketing operations within this sector can be broadly classified into three elements. product is sold from a central facility. • • MJ ERVIN & ASSOCIATES 12 . and purchase at or near the established rack price. and who essentially deal directly with the refiner.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. or in the case of cardlock facilities. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. principally into commercial trucking operators’ vehicles.

Retail outlets are operated in a variety of modes. heating fuel delivery is an integral part of a bulk sales outlet. to the aviation fuel consumer. Sales of petroleum products (principally gasoline) through retail gasoline outlets. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. There are over 850 cardlock outlets in Canada. as principal elements of petroleum marketing operations. to the motorist consumer. usually involving some aspect of the marketing sector infrastructure. for example. using delivery tank trucks. which primarily serve long-disttance truckers and commercial delivery and haulage operators. These outlets usually have considerable inventory capacity. typically at the “rack point”. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. Sales to commercial and industrial accounts by the wholesale marketing sector. and usually supply customers by delivery to the customer’s own storage tank. Sales to spot buyers at posted rack price. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities.500 retail gasoline outlets in Canada. Sales to non-refiner petroleum marketers. Sales to major industrial accounts. Before examining this sector in detail. Direct sales generally do not involve any marketing sector infrastructure. There are over 1. often delivered by pipeline or ship/barge. MJ ERVIN & ASSOCIATES 13 . at a negotiated contract price. as discussed. such as product transport and/or storage. by delivery tank truck. Sales of home heating fuels to residential furnace oil customers. and regular gasoline in particular.300 bulk sales outlets in Canada. which is generally less than the rack price. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. one final element of the pump price model must be reviewed. in smaller centres. There are about 16. according to the contractual relationship between the supplier and the dealer. In major centres dedicated Home Heat centres provide this service. Sales of aviation fuels at major and secondary airports across Canada. Sales of petroleum products through bulk sales outlets. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary.

If the pump price decreases for example. for example.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. PST). the tax content of retail gasoline in Canada has increased steadily over several years. A three-cent drop in pump price. and seven percent GST. tax content does fluctuate somewhat with pump price changes. municipal taxes. regardless of market conditions. As part C of this study shows. provincial sales tax. would include a roughly 0. which amount to 28. The petroleum industry acts as a collector of these taxes. MJ ERVIN & ASSOCIATES 14 . or roughly 50 per cent of the pump price. the tax content of the petroleum price is essentially a pre-determined. stable amount. Table 2 shows the provincial tax content for retail gasoline. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues.3 in Quebec) drop in the tax content.2 cent (0. in a small number of markets.6 cents per litre (Canada 1996 10-city average). 1 Due to the application of GST (and in Quebec. typically made up of: • • • • a ten cent per litre federal excise tax. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1.

3 27.6 3.3 Federal Excise Tax 10.0 10.0 10.5 6.6 22.0 3.3 10. An additional pump tax of 1.6 3.7 18.0 4.0 10. MJ ERVIN & ASSOCIATES 15 .0 cents is charged in the greater Victoria and Vancouver areas respectively.0 28.0 10.0 10.7 30.8 4. Provincial Tax 11.0 10.0 10.0 3.0 16.5 cents and 4. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.0 10.9 3.6 3.6 3.3 20.0 28.5 14.1 32.2 24.0 9.4 3.6 25.5 cents was introduced in the Montreal and surrounding area in 1996.2 cent per litre pump tax.0 10.5 12.2 10.1 25.0 27. All Quebec gasoline sales are subject to a 15. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.5 3.0 10.2 24.0 10.0 10.0 15. plus a 6.0 11.5 Total Tax 24.Table 2: Taxes on Regular Gasoline on December 31.8 note 1 note 2 An additional tax of 1.0 14.0 GST content (7% of pump) 3.7 3.7 13.5% sales tax applied to the GST-inclusive pump price.

3 ¢ 28. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements. The residual. and the retail gasoline sub-sector in particular. or 50. or 9 percent. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average).1 ¢ 5. and potentially. was available for product marketing operations. to derive a representative value for regular gasoline gross product margin in Canada.1 cents per litre.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56. MJ ERVIN & ASSOCIATES 16 . the brand supplier’s costs.3 percent of the average regular gasoline posted pump price.3 cents per litre. or 34 percent of the pump price. This 1 Prices and margins reflect a Canadian 10 city average. Refiner operations realized 5. operating modes.8 ¢ TAX 28.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry.5 cents per litre (after freight cost). this section provides a view of the Canadian petroleum marketing sector. and ancillary operations.2 ¢ 24. It also provides an overview of the industry in terms of several infrastructure parameters. based on regular unleaded gasoline. including retail outlet distribution.4 ¢ 19. Upstream operations realized 19. namely the dealer’s costs and income.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. Figure 2: 1996 Average Prices/Margins .5 ¢ 0.6 cents per litre. 3.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28. some profit return for the shareholder.

Both refiner and marketing margins have been in decline over the past several years.3 percent of the average urban price of regular gasoline in Canada.3 cents per litre. or “rack to retail” margin. the finished product (gasoline. In 1996. The gross marketing margin. Although many petroleum marketers conduct their own freight operations. petroleum taxes accounted for 50. is defined by the marketdriven price points of ex-tax pump price. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. and is often out-sourced to third-party common carriers.5 cents per litre. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. this is seen as a “non-core” business. it falls into the domain of the marketing sector. The marketing sector then. As the product leaves the refinery plant. is the second of two elements of the downstream oil industry. as part C will describe. for example) is sold/transferred at the current rack or transfer price. was 3. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. and it is depicted in Figure 1 as a fixed cost element. Freight cost does not typically fluctuate. In 1996. and rack price. Freight MJ ERVIN & ASSOCIATES 17 . the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. In referring to marketing margins and product margins. is usually the gas station. Bloomberg rack price values were used as the assumed wholesale price. was 5. See page 10 for further explanation.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. three key findings can be stated: Finding 4: Finding 5: In 1996. which in the case of retail gasoline. Based on the 1996 data. and is then transported to the retail outlet.

8¢ Pump Price) Upstream Operations 19. • Product sales: Within this domain.costs are generally less than one-half cent per litre in most major Canadian cities. and is therefore a poor comparative tool. As represented in Figure 3.6¢ Refiner Operations 5. petroleum marketers. but at an average cost of over $200. and upstream/refiner margins. This is a particularly useful measurement in comparing retail gasoline markets. together with gas station dealers. an average gross product margin for regular gasoline in a major Canadian city was 3.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. rural markets experience higher pump prices than do larger centres. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 . Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. incur a variety of costs. storing and dispensing a product such as gasoline adds considerably to the operating cost.000 per outlet. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). freight. as it excludes the “outside variables” of tax. which are typically close to a wholesale rack point. as it represents 80% of all retail gasoline sales. Gross product margin is therefore defined as gross marketing margin less freight cost.1¢ Tax 28. typical of any retail business. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small.5¢ Product Operations Freight 0. Posted pump price includes all of these variables. Figure 3: 1996 Average Regular Gasoline Margins (56. Unlike most other retail enterprises however.3¢ 3.5 cents per litre in 1996.

marketers have attempted with some success to differentiate their product offerings from other brands. will ultimately purchase based on price. but most consumers view gasoline as a commodity. it represents a very small percentage of total retail petroleum sales. Simply put.. This study does not examine such a broad issue however. and 9 cents per litre for premium gasoline. 4th Ed. In order to measure competitiveness. rather than the most places. 1971). and accordingly. Today. etc. Irving. Higher octane grades are more expensive than RUL. Ill. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. • Product In the past decade. a number of factors preclude this type of strategy. A portion of the market certainly responds to this type of competitive strategy. p.” or four P’s: Product. marketers compete for the consumer’s choice of transportation energy (for example. (Homewood. Jerome McCarthy. 2 E. RUL prices are therefore most often cited when relating historical price trends. Place. marketers compete to be represented in as many and/or the best locations as possible.: Richard D. gasoline). one must ask how marketers compete. expanded product/services offerings such as convenience items. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. competitive strategy of this type focuses heavily on selecting the best place. Today. and the price difference between these grades and the RUL price is referred to as the grade differential. additives. or when comparing price levels between markets. as gas stations proliferated. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. Place Typically. but in 1995 was typically 5 cents per litre for midgrade. Basic Marketing: A Managerial Approach. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. Price competition has forced marketers to optimize outlet revenue. 1960) MJ ERVIN & ASSOCIATES 19 . seasonal blends. Although revenue from this product is factored into the study market economics in Part D. propane vs.retail gasoline sales respectively1. The grade differential varies somewhat from city to city. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. Price. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. commonly known as the “marketing mix2. 1 Diesel is another petroleum product sold at many retail outlets.44 (1st Dec. page 24). competitive activity can be observed when a marketer alters one or more of the variables at their disposal.). and Promotion.

price clearly remains the predominant competitive tool used by Canadian gasoline marketers. uniform prices . Promotional activity seems to have decreased in the past few years. free item with purchase or special price item with purchase. Promotion In the gasoline retailing sub-sector. volatile prices . volatile pricing manifests itself in the form of a price war (see below). promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. low prices and/or margins. and due to the already slim margins available to marketers.while uniform pump prices are sometimes cited as evidence of industry collusion. and more importantly. This study presents an extensive historical and comparative analysis of pump prices. Examples are: • prominently displayed prices . In this context. Consequently. As such. price has proven to be the most widely used competitive tool by gasoline marketers. their subsector margins. probably due to its relatively high cost. Establishing an objective measurement of price as a competitiveness indicator however. caused by price competition. and therefore “trades” within a relatively narrow price range. is less clear. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. At its extreme. fluctuating pump prices are a significant indicator of robust competition among marketers. this study examines the dynamics of price competition in considerable detail.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. due to the largely commodity nature of petroleum product. • • • While examples of all of these indicators are abundantly in evidence.• • closure of non-viable outlets. gasoline is a commodity. • Price In most markets.contrary to some public perception. MJ ERVIN & ASSOCIATES 20 . Examples of promotional competition are: • • • brand identity gasoline discount coupon. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. gasoline is viewed by consumers as a commodity uniform in quality and widely available.

competitors will likely match this price. When this occurs. While this support may take one of several forms. and provide to the dealer what is commonly referred to as price support. are indicators of a competitive market. obviously at the expense of the supplier margin. the relationship between the supplier and dealer is generally as described on page 25. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level.where the ex-tax pump price is equal to. the effect on many consumers is immediate: they will drive into that station. who then react quickly to the change. assuming that the rack price is unchanged. one must adopt the perspectives of both consumers and competing. MJ ERVIN & ASSOCIATES 21 . Pump prices therefore tend to move uniformly within a very short time. for example). or even being squeezed to zero . But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. or when prices rise or fall apparently in unison. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. Whether through falling pump prices or rising rack prices. in order to maintain a reasonable market share. bypassing the higherpriced outlet. its effect is to restore some measure of the dealer margin. the supplier may temporarily intervene. or even less than. facilitated through street price signs. The other dealer has little choice but to quickly match. If the posted price increase is too high. the wholesale rack price. The effect of this upon the gross marketing margin is obvious: it is squeezed. Finding 7: Price uniformity and price volatility. In the case of lessee or independent dealers however. Pump price signs are an ubiquitous feature of the retail gasoline industry. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. in an attempt to gain market share. To understand the phenomenon of uniform pump prices. since they too must restore their gross product margins to sustainable levels. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. since there is no “dealer margin”. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. If one dealer decides to reduce pump prices (by two cents.When pump prices are uniform. competitors may not follow. but to competitors. Price Support In times of “normal” pump prices. or even undercut the competitor’s lower price. adjacent dealers. This is a misconception. 1 This does not occur at company operated or commission outlets.

Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. however. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. and a brief discussion of this case appears in part D. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. is beyond this study’s scope. More recently. which is administered by the federal Competition Bureau (Industry Canada). 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. provincial and even municipal levels. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. but reverts back to the dealer when the support arrangement is ceased. 1997 MJ ERVIN & ASSOCIATES 22 . Following a year-long investigation. An examination of the effect of the Competition Act. A review of historical retail pump prices in the Halifax. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. In addition. In addition. control over retail pump price effectively reverts to the supplier. While this study does not intend to undertake a detailed review of the effect of the Act. the Bureau found that there was no evidence to support these allegations1. or of direct government intervention in marketing.Under the provisions of some price support mechanisms. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. There are few current examples of direct government intervention in the pricing of petroleum products. the petroleum marketing sector has been the subject of several inquiries at federal. These cases have largely involved local dealers and/or isolated incidents. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. resulting in 9 convictions.

for safety and environmental protection. particularly in smaller population centres. or incentive for. accounting for 41% of all petroleum demand. accounting for roughly 88% of all gasoline demand. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. is in part. MJ ERVIN & ASSOCIATES 23 . creates an obstacle to. as outlined above. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. A practice. to some degree. it is clear that government policy plays an important role in facilitating.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. higher pump prices. As a product group however. and consequently. It is important to acknowledge that many regulations affecting the retail gasoline industry. accounts for about 37% of all refined petroleum demand in Canada. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. Conversely. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. Many smaller retail owner-operators. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. So defined. promotes or limits market-driven pump prices. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. or inhibiting. Retail gasoline sales. exit from an non-viable market. sales of gasoline through the roughly 16. and is the single largest market for gasoline products. This issue is discussed more fully in part D. inhibit competition. These regulations clearly exist to the benefit of all.500 retail gasoline outlets across Canada. but exist to meet other important societal needs. and at least some of this capital cost is regulatory compliance-driven. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). one can cite examples of regulatory obstacles to exit from the retail gasoline market. or incentive for. creating a need for higher margins. a competitive climate. that is. entry into an attractive market. in the form of standards for the decommissioning of retail petroleum sites. it is the single largest one. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. The high cost of building a modern retail gasoline outlet for example.

452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.6% Other Gasoline 4.9% PetroChem Feedstocks 5.7% Light/Heavy FuelOils 14.2% Asphalt/Coke 4. as shown in Figure 5.9% Diesel Fuel 22.3% Total Sales Volume: 84. This study provides an estimate of the actual retail outlet population. This survey accounts only for major established retail networks .1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 .2% Propane /Butane 2.7% Lube/Grease 1.2% Retail Gasoline 37. Figure 5: Canadian Retail Outlet Population .Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6.2% Other 0. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.it has no practical means to enumerate each and every outlet.

Several possible relationships. as one might expect. The supplier. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. who manages the day-to-day operations at the retail outlet. and all inventory and revenues belong to the supplier. controls the setting of the pump price. The principal dealer and attendants are salaried employees of the supplier.500 in 1995. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 .513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. who holds initial title to the refined petroleum as it leaves the rack point. and this is of some importance with respect to the matter of prices and competition in this sector. using Octane counts only) is roughly equivalent to population densities. to about 16. exist between retail dealers and their suppliers.000 outlets in 1989.The estimated number of retail outlets in Canada has declined from 22. Distribution of these outlets by province (Figure 6. or modes. and usually owns the brand name seen at the retail outlet. as owner of the product. the retail outlet is owned and operated entirely by the product supplier. and the dealer. There are two main stakeholders involved in the marketing of retail gasoline: the supplier.

the outlet facilities and petroleum inventory is owned by the supplier. but the outlet operator (“dealer”) is compensated by a commission payment. and pays them from his commission revenue. The “dealer” is in essence. supplier salary from supplier. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. the supplier retains control of the retail pump price.sub-component margins . who pays all outlet operating costs. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. The dealer in turn hires attendants. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 .the entire gross product margin accrues to the brand supplier. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. an employee of the supplier supplier supplier typically the dealer. usually based on cents per litre of petroleum sales. based on pump sales volume. Control of Pump Price Dealer Compensation supplier a commission from the supplier. Since the supplier owns the petroleum product at this type of outlet.

can vary considerably from one supplier to another. less the Dealer (wholesale) Price charged by the brand supplier. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. This Dealer Price. The margin between these two prices is the dealer’s gross revenue. unlike rack or pump prices. The margin between these two prices is the dealer’s gross revenue. and in turn resells to the motorist consumer at a higher pump price established by the lessee. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. since it is predicated on contractual arrangements between the dealer and the supplier. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. and means of compensation supplier. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. The dealer pays most or all of the expenses associated with operating the outlet. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. MJ ERVIN & ASSOCIATES 27 . The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. and sells at the posted pump price. and sells at the posted pump price. not the supplier.product from the supplier at a “Dealer Wholesale” price. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. dealer-established retail price. the retail facilities are owned by the dealer. and has control over the retail pump price. This dealer margin is defined as the pump price (ex-tax).

While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. 1 Unless the dealer is under a price support arrangement (for instance. In addition. virtually none of the major integrated outlets are company operated. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. or Imperial Oil). MJ ERVIN & ASSOCIATES 28 . some general figures are mentioned here. and fully two-thirds operate as lessees or independents. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. during a price war) as previously described. The remainder represent one of over 50 different marketer organizations. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. Petro-Canada. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. who themselves establish pump prices. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector.

ancillary service has had the consequence of subsidizing the pump price of gasoline. In effect. to over five million litres in major markets such as Toronto. Based on a sampling of outlets surveyed in this study. Many outlets have more than one ancillary offering: many “flagship” outlets for example. and is a result of. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. Improved outlet revenue from ancillary operations has caused. Most ancillary services are operated by the dealer/lessee. These improved outlet throughputs have provided for improved petroleum revenue potential. more fully described in part C. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. average annual throughputs ranged from under 1 million litres in smaller population centres. which in part has led to a reduction in retail product margins. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. Figure 8 depicts the Canadian representation of several key ancillary services. has had a profound effect on the retail gasoline marketing sector. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . reduced petroleum margins. In fact.While an average outlet throughput may be in the order of 2. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. these study findings show that this can vary widely from market to market. feature both a large-area convenience food store and a modern car wash facility.5 million litres. Canadian throughputs have dramatically improved in the past several years .

An “all markets” average. Unless noted. as can be seen in part D of this study. the “Canada average” price reflects an average of urban markets only1. when the Persian Gulf War caused crude prices to increase significantly. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. including smaller markets. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. mainly using Canada average values. As such. MJ ERVIN & ASSOCIATES 30 . many utilize terms which are explained in part A. Since rising prices are common to most consumer goods and services. Regional and market-to-market comparisons are presented in greater detail in part D. Since 1 Data is not regularly collected on smaller markets. an examination of the specific historical record of gasoline prices is useful.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. prices are for regular unleaded (RUL) gasoline. particularly around 1990. would be somewhat higher. While some of the presented findings are selfexplanatory. This shows that pump prices have increased in nominal terms. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. This part examines broad trends in several areas. and with which the reader should be familiar. using a Canada 10city weighted (by provincial demand) average.

gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. as defined in part A of this study. and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. ex-tax equivalent prices. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. as in Figure 10.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages.1990. and relative crude cost. When compared to other consumer goods. In constant dollars. When pump prices are reduced by the amount of tax content. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. rack price. MJ ERVIN & ASSOCIATES 31 . retail pump prices were about 7 cents less in 1995 than they were in 1986. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. It also depicts the associated margins. nominal pump prices decreased. Figure 10: CPI Index Comparison .

In fact. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. the presence of these additional market factors have operated to the benefit of consumers. as the next section shows. and the rise in the tax content. Figure 12 shows that industry margins have not been constant over time. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. which in turn. If. and have risen slightly since 1994. Margin History While Figure 11 provides an indication of key price trends. due to additional market factors which affect pump and rack prices at any given point in time. which are defined by the price points. it simply passes on a fixed cost margin to determine the “correct” pump price. as Figure 11 shows. as shown in Figure 12. as might be suggested. MJ ERVIN & ASSOCIATES 32 . the downstream industry operates on a “cost-plus” basis. are principally a reflection of changes in the underlying price of crude oil. that is. nor do rack prices exactly follow crude costs. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. and in fact have displayed a declining trend over the past six years. it is also useful to examine the behavior of margins.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. It is important to state that pump price changes do not occur in exact lock-step with rack prices. then one might expect margins to be quite constant over time.

which have both shown a consistent decline throughout the period 1991 to 1996.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. compared to the Canadian average.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . the gross marketing margin can fluctuate quite significantly1. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. and has been a result of. not weekly or daily data. MJ ERVIN & ASSOCIATES 33 . several factors. this upward trend is not attributable to “downstream” refiner or marketing sector margins. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. The decline in refiner and marketing margins has both resulted in. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. This shows that on a monthly basis.crude) 5¢ Marketing Margin (retail . the actual fluctuation is much more pronounced than shown. 1 In fact. A more thorough discussion of specific market factors for these and other centres appears in part D. since the chart is based on monthly averages. as local competitive factors act to self-regulate pump prices. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. Finding 13: From 1991 to 1996. In particular.

is presented in Figure 14. A comparison of Canadian and US regular gasoline pump prices. with and without tax. US pump prices. On an ex-tax basis. although Canadian pump prices in urban markets are clearly higher than in the US. This shows that. if not all of the difference in pump prices between Canada and the US. or even less than. for several years. US Price History The retail gasoline tax structure in Canada is vastly different than the US. resulting in significantly higher Canadian gasoline prices. Canadian pump prices have been roughly equal to.Figure 13: Monthly Gross Marketing Margins.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. This difference accounts for most. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . this is wholly attributable to the difference in taxation.

page 24) and somewhat increased demand. have improved considerably. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. behave in a very similar fashion.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. largely as a result of two factors: • Canadian marketing margins have decreased in this period. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . when compared on an ex-tax basis. both a cause and an effect of improved throughputs and ancillary revenues as previously described. RFG has not been introduced to Canadian markets. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. From this it can be seen that Canadian and US rack prices. Prior to 1994. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. Canadian outlet throughputs (although likely still less than those of the US). While these trends have also occurred in the US. as a result of outlet closures (see Figure 5. and moving up or down more or less in unison. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. This is no longer the case however. This would be a useful area for further research. Figure 15 compares these values for selected Canadian and US centres over a period of several years. Canadian ex-tax pump prices were historically somewhat higher than in the US. • Although this study shows that on an ex-tax basis. trading at any given time within a relatively narrow (about 2 cents per litre) range. which is reflected in US average pump prices.

That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets.900. albeit less distinct pattern.000 2. as demand ebbs and inventory improves. increasing significantly every spring.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. and falling in the latter half of each year. or indeed anywhere. Pump Price (nominal ¢/litre) 3.000 1. Figure 16: Monthly Demand vs. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”.700. not only in a given market. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories. Gasoline demand exhibits a very regular seasonal pattern. Gasoline price exhibits a similar. Price History Figure 16 shows the history of Canadian gasoline demand. the price tends to be bid upwards. but in fact across the North American continent (US demand follows a similar pattern). To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense). Yet in the latter half of each year.700.300. Demand vs.000 2. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America.000 34¢ 2. or sales.000 24¢ 1. rising and falling closely in step with demand. As non-refiner marketers attempt to secure a supply of this diminishing inventory.900. Simply put.000 1.100.500. and as would be expected in any commodities market under these conditions. compared to average ex-tax regular gasoline pump price for the same period. and prices tend to fall. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 .500. conditions begin to favour a “seller’s market”.000 2. a “buyers market” develops.000 2. of motor gasolines from 1991 to 1996.100.

The traditional supply-demand model predicts that when demand rises. so do prices. demand rose approximately 8. gasoline prices have not followed the traditional model. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. in that prices have fallen. This is of course. has operated in a highly competitive environment. while average ex-tax pump price declined by 14% (since 1994. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. the essence of a free market economy. which consists of the refiners and marketers of gasoline and other petroleum products.3%. competing to meet their own needs. as evidenced by declining industry margins. Figure 16 shows that from 1991 to 1995. All of the findings suggest that. and product taxes which add to the consumer price of gasoline. MJ ERVIN & ASSOCIATES 37 . despite a rise in demand. which ensures a competitive product price for buyer and seller alike. while world crude prices and Canadian taxes have generally increased over the past several years. the downstream petroleum industry. a feature of most marketregulated commerce.Whether in the spring or the fall. their related product costs and margins. This part of the study presented a number of historical views of retail gasoline prices. On a long-term basis however. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. pump prices have increased due to a significant rise in crude costs in this period).

freight. namely product margin. is useful in providing broad overviews of industry price and margin trends. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. outlet volumes. A number of factors such as taxes. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. These “outside factors” tend to obscure the more relevant aspect of pump price.. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. etc. and pump prices alone provide very little opportunity for “comparability”. and a more detailed examination of price. and in order to provide insights into the range of competitive dynamics that may exist. play a role in a market’s pump price.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. • Methodology Selection of Markets A number of markets were selected for the study. outlet costs. ancillary revenues. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. MJ ERVIN & ASSOCIATES 38 . Nineteen markets were therefore adopted for the study (Table 3). there is no regular monitoring of pump prices in smaller centres. although one was subsequently dropped due to insufficient submitted data.

Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. To this end. In all. Suncor Inc. Process Overview As illustrated in part A. the gross marketing margin must be examined in isolation from those other variables. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. but a number of variables. retail pump prices . the gross marketing 1 Although White Rock is clearly not a major centre by itself. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. price history data not available through public sources. Petro-Canada. Shell Canada. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500..Each market was classified according to regional affiliation (BC/Prairie. Ontario. Five companies responded to this request: Imperial Oil. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. To examine the competitiveness of the marketing. and Canadian Tire Petroleum. it was essential to obtain data not normally available through existing public sources. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet.and consequently competitiveness . these organizations provided market-level data on freight costs. MJ ERVIN & ASSOCIATES 39 . and for smaller markets. 2 Depending upon the outlet mode. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. retail outlet and brand representation. and Group B markets less than 500.are influenced not by one.000. In addition.0001. or “rack to retail” sector. Furthermore.

and freight were successively removed from the pump price. rack price. Using the derived gross product margins and volumes for each market. 2 Accordingly. 2. Where differences in gross product margin might still exist. a market-by-market profile of outlet income is presented. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). MJ ERVIN & ASSOCIATES 40 . This allows for an accurate determination of net outlet revenue. to arrive at “blended” values2. The variables of tax content. including some smaller centres. 1 Although outlet cost and ancillary revenue data was not available for all markets. weighted by sales demand. For each market. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. tax content. From participant company supplied data. 3. and the final “rationalized” gross product margin was determined for each market. and freight. these were weighted by volume. to derive the 1995 average gross product margin for each of the study markets. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. a broad representation of markets was possible. 1995 average values were determined for pump price. in addition to operating cost and ancillary revenue data gathered in the study1.margin is stripped of its freight component. as the “blended” price includes other product grades. average pump prices are higher than actual average regular gasoline prices. by product grade. Where applicable. The gross product margin thus serves as an interim basis for comparing study markets. Group B (smaller market) and 19-market study averages. average outlet annual throughput was determined for each market. Finally. rack price. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices.

many wholesale petroleum purchases are made at less than the “posted” rack price. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain.7 million. including relatively smaller ones such as Sioux Lookout or Gaspé. These differentials do vary from one market to another. these 19 markets represent a combined population base of 8. it is important to understand that the use of rack price in this analysis has certain implications. perhaps by 1 to 2 cents per litre. Unlike retail pump prices however. petroleum revenues.. This value was then applied to the gross product margin to determine average outlet petroleum revenue. Interpretation of Data In some smaller centres. as described on page 10. . Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. While clear. also considering that RUL constitutes the majority of product. or consolidated net incomes. product margins. encompassing a significant portion of the entire Canadian market. 6. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income... MJ ERVIN & ASSOCIATES 41 . Supplier Overhead costs. A dollar-per-outlet estimate of these elements was made. and supplier profit. represent a broad range of markets. The derived weighted average values of pump price. and accordingly represent a broad spectrum of consumers and marketers. average revenues from ancillary services were added.. but they are relatively minor. marketing margin. the effect on the “blended price” is small. and from one brand to another.to determine average consolidated net revenue per outlet. a recognized source of data on world crude oil and petroleum markets and prices. Wholesale refined product prices used in this study are therefore likely to be overstated. and gross product margins are therefore likely to be understated. Also. objective data exist for both of these values. and therefore where assumptions were made. 5. When these margins are applied to outlet throughputs as in step 4 above. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. From participant company data. grade differentials were based on known differentials of nearby markets. etc.. In referring to marketing margins. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. Bloomberg rack price values were used as the assumed wholesale price.4. freight. and outlet operating costs were deducted from total revenue. 7. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. so that on a cents-per-litre basis. This variation is constant across all nineteen markets however. accurate comparisons are possible.

but a variance of only 12. accurate.38 cents per litre in ex-tax pump price. there is little to suggest why such a high variance exists. The study data suggests that variations in tax rates account for a significant part of pump price differences. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. The 19-market study group exhibited a statistical variance1 of 17. and based on objective. The data shows a statistical pump price variance of over 17 cents per litre within this study group.64 cents per litre in pump price.8 cent difference in pump price 1 See footnote at Appendix II. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however. MJ ERVIN & ASSOCIATES 42 . table J for an explanation of how variance is derived. The data also shows that typically.Rack prices used in this study are nevertheless market-driven. A 6. independently gathered data. while lower prices tended to prevail in major centres. The first of these variables to be examined is tax. Tax Figure 19 shows posted pump prices for the study markets. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. broken into tax and extax components. higher priced markets are associated with smaller population centres.

ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. accounting for roughly half of the average retail price. when examined on an ex-tax basis. This eliminates any effect that tax variability may have.75 cents per litre (Vancouver. The data shows that taxation between markets within the same province varies little. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. provincial tax rates can vary greatly. Montreal). namely the upstream industry and refiner sector.while all markets are subject to the same rate of federal excise tax and GST1.tax. while taxation between provinces is more pronounced . but the variance is minimal . additional elements of the revenue stream must be further isolated. it is therefore more useful to use ex-tax pump prices when comparing any two markets. Upstream and Gross Refiner Margins Although the deduction of tax content is useful. thus providing a better basis for comparison. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. taxes were a significant element of pump price. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. as described in part A. was less than three cents. GST content can vary by market. 1 Due to pump price differences.between Calgary and Vancouver for example. MJ ERVIN & ASSOCIATES 43 . or when examining historical price trends. Figure 19: Pump Price .less than one-half cent per litre. In all study markets.

reflecting some differences in refinery crude acquisition costs. To address this. MJ ERVIN & ASSOCIATES Cents per litre 44 . are clearly delineated by market-driven crude. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. This is due to the fact that for any market. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. in the case of Thompson). it should be restated that each of these sectors. rack and pump prices. the rack price is equivalent to the upstream margin plus the refiner’s margin.assuming transport costs did not outweigh the price difference. rack price) and gross marketing margin elements. the validity of analyzing gross marketing margins in isolation might be raised. reflecting the reality that at the rack level of competition. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. and therefore are best analyzed separately. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. as is examined below. but ultimately. as this would cause rack buyers to bring product in from the lower-priced region . Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. if a clear understanding is to be achieved. Freight costs are additional. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. one region cannot maintain rack prices at a higher level than another. and their respective margins. When rack price is deducted from the ex-tax pump price. differ little from those of major centres. the rack price is set at the rack point (Winnipeg. Furthermore.

it is essentially a “non-core” business. To provide a comparative view of the marketing dynamics within the study group.0 cents per litre.49 cents per litre (gross product margin).16 cents per litre (gross marketing margin) to 7. with their component freight costs. Two of the study markets had freight costs in excess of 3. resulting in comparative gross product margins. in fact. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. Figure 21 shows a study market comparison of gross marketing margins. one final outside variable must be isolated: that of product freight. as low as 0. For other. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. Before using this as an analytical tool however. and therefore a significant pump price factor. MJ ERVIN & ASSOCIATES 45 . For markets which are also established as rack points. Although freight operations are often an integral part of many petroleum marketing operations. particularly in comparisons of major urban markets to small. it is therefore important to eliminate the freight variable from the gross marketing margin. generally smaller markets. the data shows that freight is often a significant part of the gross marketing margin. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies.3 cents per litre. this freight cost is almost negligible. remote population centres. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13.

Bloomberg rack price values were used as the assumed wholesale price. A 7. at 14.6. For all study markets.5 cent variance in gross product margin is still significant however. to the resultant retail gross product margin . or between any two regions. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17. was the highest of the study group. The study revealed that: • • Retail gross product margins differ very little between major urban markets .17 cents per litre.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market. MJ ERVIN & ASSOCIATES 46 . Group A (larger population) markets averaged 5.68 cents per litre1.a variance of only 2.5 cent per litre average relates to regular gasoline in major markets.6 cents) to the variance in their component gross product margins (7. 1995 gross product margin averaged 5. while Group B markets averaged 7. as the 3. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets. was the lowest. or consolidated net incomes. product margins. In referring to marketing margins. while Toronto.the gross revenue available to the petroleum marketing sector for its operations.5 cents per litre average Gross Product Margin cited in Part B. Gaspé. at 3.22 cents per litre Smaller markets showed a wider variance in gross product margin . whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres. petroleum revenues.68 cents per litre.5 cents).95 cents per litre. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3.06 cents per litre.42 cents per litre.

000 2. To understand why such a wide range of margins can exist after eliminating all tax and freight variables.000.000 Litres 3.differences between markets. 3.000 1.000 4. If these two factors are related to each other as they are in Figure 24. Indeed.14. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. Figure 23: Average Annual Throughput per Outlet 6.000. ranging from under 700. if any retail gasoline outlet located in the Toronto area for example. an examination of related outlet throughput volumes is necessary. sold significantly less than 5 million litres of petroleum per year.000. a wide range of variability still exists between markets in the study group .000.000 litres per year (Sioux Lookout) to over 5. once isolating retail gross product margin from all of the “outside” pump price factors.000. vs.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that. it would likely be so unprofitable as to be un-viable. for example.000 litres per year (Toronto).1 cents per litre in Toronto.000. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 .000 5. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group. A wide range of volume performance is evident.2 cents per litre in Gaspé.000. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow.

all market groups (BC/Prairie. Ontario. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput.000.000 3.962 R2 = 0.6624 1. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5. Smaller markets perform as competitively as larger centres. Regionally.000 2.000 Volume (litres) 4. With few exceptions. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput. If all outlets in a given market experience generally low throughputs.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.that is.000 6. On average however. while those with high Gross Product Margins tend to have low outlet throughputs. not of poor competition. compared to 2.000. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes. As most outlet operating cost are fixed in nature .000.6634Ln(x) + 76.7 million respectively. Although MJ ERVIN & ASSOCIATES 48 .000.000. they remain essentially the same regardless of volume changes . an outlet with low throughput would derive less petroleum revenue than a high-volume outlet.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.000 5. it follows that higher gross product margins will be the consequence.42 cents) than smaller (Group B) population centres (7.4 million litres annually.95 cents).Figure 24: Outlet Volume vs. the Group A market outlets had roughly 50% more throughput than Group B outlets .000.

is only a measure of petroleum revenue per litre. supplement their incomes with other revenues. in addition to petroleum sales.000. Ancillary revenues are those derived from non-petroleum sales sources. product cost. and the resultant consolidated net revenue. and auto service. such as convenience stores.000.000 6. while operating costs are those costs which are directly incurred in the operation of the retail facility. and must be examined. These additional factors clearly have an effect on the relative competitiveness of retail markets.000 5. supplier overhead costs. as described below. ancillary sales.000. less outlet costs. which for the study group. two additional factors are introduced: ancillary revenue and outlet operating costs.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. In reality.000.000 4. competitiveness occurs between retail outlets.the revenue available for dealer income. which. It represents the residual revenue which is available to the dealer and to the supplier. this is likely due to the higher incidence of Group B study markets within this region.000.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). and supplier MJ ERVIN & ASSOCIATES 49 . and ultimately shows that very little difference in competitiveness exists between any two markets.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions. car wash.000. averaged $69. Figure 26 summarizes total outlet petroleum sales.000 2. Figure 25: Outlet / Volume Relationship . Consolidated Net Revenue per Outlet To create a complete.000 3. however.716 . Gross product margin. outlet-based view of retail markets. and incur many expenses in the course of their commerce.

although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue. Figure 26: Outlet Revenues. these ancillary operations contributed to a lower product margin and consequently. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer.Group B outlets were not as profitable as these revenue values might suggest. as explained below. Most markets showed relatively similar net revenues (see Appendix II.000 $250.000 $200. Table K). causing the weighted average for Quebec / Atlantic to be depressed). consolidated net revenue is the residual revenue which is available to the dealer and to the supplier. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets .000 vs.000) $(150.profits.$154. MJ ERVIN & ASSOCIATES 50 . and his personal labour investment. As described above. In effect. An examination of these component elements reveals a significant finding: that for most markets. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist. Income BC/PR $300.000) $(100. Finding 19: Based on published rack prices.000 $100. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.000 $150.000) $(250. Costs. which reflects his investment in the outlet.000) $(200.000 per year respectively . $60.000) $(300.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. A discussion of the ultimate distribution of this revenue is useful.000) $(350. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets. reduced pump prices.000 $50.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs.Vancouver population # of brands # of outlets outlets per 10. as described below.542.658. ranking 11th. contributing to a higher than average pump price. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market. Overall. Figure 28: Vancouver .000 barrel per day plant located in the greater Vancouver area. Vancouver collects a 4 cent per litre municipal tax. this market has access to numerous refiners along the Pacific coast through marine supply. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. The somewhat high margin placed this market slightly above.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets.38 ¢ 7.000 1. Geographic / Supply / Freight cost considerations: As a port city.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . but well within a cluster of markets with similar throughputs.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 .98 ¢ 0. and also has local refining capacity. This may explain the somewhat elevated gross product margin in this market. while average throughput ranked 4th. Influence of other markets: Although relatively close to the US border. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average. Vancouver is also a terminal for a refined products pipeline from Edmonton.968 litres 7. net outlet revenues were less than those of other major centres. a 60.745 18 446 2.ex tax Canada Average .89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. and with access to wholesale product by several means. Vancouver provides several perspectives into retail marketing. Low consolidated net revenues may have contributed to the higher margin.

Geographic / Supply / Freight cost considerations:. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. this market is subject to a 4 cent per litre municipal tax. due to its proximity to one. Influence of other markets: Although this market is a border-crossing community.45 ¢ 7. Vancouver. adjacent to the United States border. Freight costs were accordingly low compared to other small markets in this study. prices. but less than most markets with a small population base. the White Rock retail gasoline market displayed the same attributes as a major urban market. the study data found little to suggest a material effect upon representation. MJ ERVIN & ASSOCIATES 55 . prices in this market have historically mirrored those of Vancouver. or competitive dynamics.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Despite its relatively small size. White Rock is essentially part of a major market due to its proximity to Vancouver.White Rock population # of brands # of outlets outlets per 10. White Rock’s margin was typical of markets with similar outlet throughputs. gasoline “cross-border shopping” is less pronounced than might be expected. This suggests that. and retail gross product margin was less than that of markets with a similar population base. This market is close to its usual rack point.630 litres 7.98 ¢ 0.315 4 8 4.604. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. Average outlet throughputs were relatively high. This is likely due to the fact that unlike many smaller markets. at least in this market. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip. Like Vancouver. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. Price history / Taxation: Although no specific data is available.000 16. In all respects. thus providing some unique characteristics for the market study.

47 ¢ 0. Rack-to-outlet freight costs are among the lowest in the study group.719 litres 6.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 . Consolidated net revenue: was typical of other major markets in the study group. Indeed. Calgary pump prices are very close to the Canadian average. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. indicative of a strong competitive climate.675 27 313 4.ex tax Canada Average .Calgary population # of brands # of outlets outlets per 10. Price history / Taxation: As the figure below shows. Figure 29: Calgary . pump prices in this market have historically been well below the Canadian 10-city average.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics.000 710. Product is usually sourced from Edmonton refineries via pipeline.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Calgary had the third highest number of retail brands.24 ¢ 6. Other considerations: Of the markets studied. which was one reason for selecting Calgary as a study market. Some smaller markets in the vicinity have occasionally priced below Calgary.827. creating some competitive pressures (see Nanton). Calgary is of sufficient size to support a viable rack market.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. Influence of other markets: Calgary is fairly remote from US and other major markets.

Regina was of some interest as a study market.21 ¢ 7. and is therefore a recognized rack pricing point. supply/demand is likely more balanced.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average. this market is removed from other significant markets.794 litres 7.180 15 86 4. margins and throughputs were typical of other markets with a similar population base. price volatility has eased.089. Although no supporting data is available. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets.Regina population # of brands # of outlets outlets per 10. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity. Influence of other markets: Like Calgary. and therefore experiences no particular influences from any other major market. and this market is now more typical of other large population centres. Since 1993. it is likely that this reflected a surplus of wholesale inventory within the local market or region. Figure 30: Regina . Ex-tax prices are also above average. which are among the highest in Canada. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity.000 179. and a history of volatile pump prices.50 ¢ 0.ex tax Canada Average . Consolidated net revenue: was typical of other similar markets. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. This is partly due to provincial taxation levels.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price . Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . Since then.

and has remained very close to the Canadian 10-city average. possibly due to modest ancillary revenue.790 17 261 4.ex tax Canada Average .217 litres 8. this market has exhibited relatively stable pricing. probably related to a regional surplus of wholesale inventory (see Regina).265. prices have tended to stay somewhat above the Canadian average. Price history / Taxation: In the early 1990’s this market experienced some price war activity. This may reflect a lower than average Consolidated Net Income. this market is removed from other significant markets. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 . Since then. and therefore experiences no particular influences from any other major market.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.06 ¢ 0.22 ¢ 7. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs. although. Figure 31: Winnipeg . it is an established rack price point.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. Consolidated net revenue: No ancillary or outlet cost data was available for this market.Winnipeg population # of brands # of outlets outlets per 10.000 616. like most markets of this population density. On an ex-tax basis. though somewhat higher than average ex-tax pump prices. although there is no study data to support this. Influence of other markets: Like Calgary.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price .

Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices.600.41 ¢ 5. Nanton had the second lowest gross product margin of the study group. it is likely that low operating costs. Despite its small size.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Nanton had a high number of per capita outlets . In this respect. as Figure 24 shows.071. while others experience consistently high prices. Alberta population # of brands # of outlets outlets per 10.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary. Influence of other markets:.91 ¢ 0. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group.and a low average outlet throughput. this market has a relatively low freight overhead. situated on a major North-South highway to the United States Among the study group. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market . Unlike many of the smaller markets in this study group.Nanton. and perhaps healthy ancillary sales associated with highway traffic. the retail gasoline market in Nanton was not restricted to the local population. Nanton was the smallest market in terms of population. placing Nanton well below the expected margin.the highest of the entire group . due to its proximity to one. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. Due to its highway location and its proximity to Calgary. although not as low as expected. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. MJ ERVIN & ASSOCIATES 59 . more isolated small-town markets. Price history / Taxation: In order to attract market share beyond simply the local population. Consolidated net revenue: No Ancillary or cost data was available. Nanton has traditionally priced either at or below Calgary. a feature not available to other. in order to maintain a share of the considerable potential sales revenue that passes through this market. the Nanton retail gasoline market displayed the same price attributes as a major urban market.000 1.000 litres 5. Nanton was perhaps the least viable market in the study group. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. Average outlet throughputs were relatively low. While these conditions would normally result in a high gross product margin. Nanton appeared to benchmark its pump prices to those of Calgary. in terms of expected petroleum revenues.585 4 5 31.far in excess of what would be expected of a community with a population of 1. would have an offsetting effect.

isolated markets.000 6.45 ¢ 1. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. and due to its isolated locale in northern Alberta. its normal rack point.Peace River.157. In contrast to Nanton. Supply is via tanker truck from Edmonton.6 ¢ 10.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. MJ ERVIN & ASSOCIATES 60 . Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high.715 6 8 11. isolated markets. they were comparable to other markets with similar average throughputs. further adding to overall high pump prices.623 litres 12. Peace River also experiences high freight costs. the community of Peace River is subjected to a number of factors which give rise to higher than average prices. Alberta population # of brands # of outlets outlets per 10. though fairly typical of many smaller. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. high pump prices. and in fact fell into a tight cluster of four other study markets. Price history / Taxation: Peace River is typical of small. Peace River has among the highest freight cost in the study group. other markets. Geographic / Supply / Freight cost considerations: At 1.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. and was accordingly chosen as a study market. experiencing relatively high gross product margin and consequently. nor is it influenced by.6 cents per litre. this market has little or no influence upon.

the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. further adding to overall high pump prices. Consolidated net revenue: Low outlet throughputs were offset by higher margins. and due to its isolated locale in northern Manitoba.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. MJ ERVIN & ASSOCIATES 61 . Although outlets in Thompson appear to be as competitive as those of any other study market. Thompson is faced with the dilemma. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. they were comparable to other markets with similar average throughputs. Supply is via tanker truck from Winnipeg.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. outlet costs were also modest typical of most smaller markets. nor is it influenced by. the community of Thompson clearly falls into the category of a small. Influence of other markets: Since is not located on a major inter-uban thoroughfare.Thompson.02 cents per litre. a significant portion of which would likely be distributed towards supplier overhead costs. remote market. Other considerations: Like other small markets. this market has little or no influence upon.1 ¢ 3. experiencing relatively high gross product margin and consequently.000 14. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. isolated markets. Manitoba population # of brands # of outlets outlets per 10. other markets.02 ¢ 11. Geographic / Supply / Freight cost considerations: At 3. high pump prices. Thompson is among the highest freight costs in the study group. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. These factors resulted in relatively strong per-outlet net revenues. thereby creating the potential for narrower margins. Although ancillary revenues were the smallest of the study group. This however.975 5 6 4.014. Price history / Taxation: Thompson was typical of small.520 litres 14. It also experienced high freight costs. and in fact fell into a tight cluster of four other study markets. and reduced pump prices. its usual rack point. resulting in per-outlet petroleum revenues which were quite typical of many markets.

as evidenced by an exceptionally low gross product margin. thus there exists a climate of robust competition. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. stretching from Pickering to Buffalo.36 ¢ 0. It consequently has a low freight component. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. similar to that of Montreal.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 . least number of outlets per capita. This is likely offset by high operating costs. In addition.775 30 546 2. With an average “blended” gross product margin of only 3. Influence of other markets: This market is continuously linked with several other major retail markets. and a resultant low consolidated net revenue.06 cents per litre.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5.000 2. Consolidated net revenue: Although no study data was available for this market. Figure 32: Toronto . New York.098. and is also relatively close to wholesale supply sources in the US. and first in average throughput per outlet.extax Toronto Posted Price .06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group. it had the second highest brand variety of the study group. On an ex-tax basis however. it is likely that outlet ancillary revenues are among the highest in the country. this market was consistently less than the 10-city average. this market ranked first in a number of measures: lowest gross product margin.Toronto population # of brands # of outlets outlets per 10.3 ¢ 3. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput. Within this region are thousands of retail outlets. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity.275.478 litres 3. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average .

Figure 33: Ottawa . several smaller. Other considerations: While pump prices in this market were somewhat higher than in Toronto. rural markets co-exist in this area.Ottawa population # of brands # of outlets outlets per 10. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. Consolidated net revenue: was low.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . Influence of other markets: Although Ottawa is the only major market in the immediate area.145 19 209 3.ex tax Canada Average . and operating costs were higher than most.000 678. slightly lower that expected. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis. some of which have on occasion priced below Ottawa (see Nanton and Calgary).29 ¢ 5. and close to the Canadian 10-city average. in fact.004. freight costs within this market were quite low.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price .948 litres 5.97 ¢ 0. Although petroleum revenues were typical of major markets. ancillary revenue was slightly lower than average. Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets. exhibiting all of the characteristics of robust competition.

Pump prices in this market were thus typical of any market with similar throughput characteristics. and between 5 to 8 cent per litre in gross product margin.73 ¢ 1. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). yet with some potential for cross-border retail competition. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput.475 10 24 2. Sault Ste Marie is a sizable market. average throughputs were modest.465. This would suggest that a significant market share is being lost across the US border. Freight costs are therefore high. partly due to higher freight costs. this Canadian market has some difficulty in remaining both competitive and viable.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group. MJ ERVIN & ASSOCIATES 64 .Sault Ste Marie population # of brands # of outlets outlets per 10.000 81. somewhat isolated. and accordingly.550 litres 8. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. Influence of other markets: This market is close to a US border market. a consequence of the transport distance from the rack point. a product of relatively strong net petroleum revenues combined with lower than average operating costs. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point.22 ¢ 7.

An average outlet in Sioux Lookout pumped only 694. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets.066 litres 14.Sioux Lookout population # of brands # of outlets outlets per 10.2 ¢ 11. with little or no influence from other retail gasoline markets. Sioux Lookout is well-removed from any major highway.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group.310 3 3 9. so that virtually all sales volume represents local demand only. Consolidated net revenue: No data was available for this market.96 ¢ 3. This would suggest that.006 litres in 1995. this market experiences a high degree of price competition. and outlet throughputs of any market studied. although high. MJ ERVIN & ASSOCIATES 65 . Influence of other markets: This is clearly an isolated market.000 3. This is a major factor in the high cost of gasoline in this market. largely due to higher freight costs. was much less than expected for a market of this size.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. and had the least number of outlets. despite its high prices. brands. It therefore presents some unique characteristics for the market study. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. Freight costs are therefore high. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. in fact the second highest in the study group. one-seventh the average throughput in Toronto.

this market interacts with several other markets in the region. an additional tax of 1. pump prices in Montreal have generally been at or below the 10-city average for major markets.extax Montreal Posted Price . With 32 competing brands. Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets. and is also relatively close to wholesale supply sources in the US. It therefore represents a highly competitive rack market. pump prices in this market have a tendency to be volatile. combined with low petroleum revenues and high operating costs.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 .000 1. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes.144 litres 5. thus promoting a competitive climate.43 ¢ 0.Montreal population # of brands # of outlets outlets per 10.775.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region.870 32 866 4. this market ranks first of the study group in terms of brand variety. Influence of other markets: Like Toronto. a function of a competitive rack market and an excess of retail outlets competing for market share.394.5 cents per litre was introduced into the Montreal area). Price history / Taxation: As the figure shows. This. with resultant low average outlet throughputs. placed Montreal lowest of all study markets in terms of consolidated net revenue. Montreal was included in the selected market study.3 ¢ 5.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity. This market had the highest tax content of the study group due to high provincial tax rates (in 1996.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average . On an ex-tax basis however. Figure 34: Montreal .

Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. within a cluster of other markets with similar attributes. were quite typical of markets with similar populations.000 120. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base. MJ ERVIN & ASSOCIATES 67 . a partial factor in the high cost of gasoline in this market. for example). Chicoutimi is normally supplied from the Quebec city rack. Consolidated net revenue: was average among the study group. by tank truck.250. both pump and ex-tax prices in this market were higher than average. Nevertheless. yet is geographically quite isolated. Freight costs are therefore somewhat high. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John.75 cents per litre.28 ¢ 1. this amounted to a reduction of 5. but is quite isolated from any other markets.605 14 97 8. but as the figure shows.Chicoutimi population # of brands # of outlets outlets per 10. this market has little potential as a rack market. although low.289 litres 12. Margin/Throughput relationship (Figure 24): Outlet throughputs.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. In the case of Chicoutimi.08 ¢ 11. Gross product margin was accordingly high.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base.

in the case. by tank truck.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981.75 cents per litre. a product of high freight costs and gross product margins. in fact the highest in the study group. a key factor contributing to its 14. Although operating costs are likely to be low in a small market like Gaspé. This is a major factor in the high cost of gasoline in this market.33 ¢ 14.900 litres 17.17 gross product margin the highest of the study group. Freight costs are therefore high. amounting to a reduction of 5.Gaspé population # of brands # of outlets outlets per 10.000 16. both pump and extax prices in this market were higher than average. Gaspé is well-removed from any major highway. located at a considerable distance from its rack source of supply. with little or no influence from other retail gasoline markets. ancillary revenues would likely be modest. MJ ERVIN & ASSOCIATES 68 . Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.50 ¢ 3. so that virtually all sales volume represents local demand only. Nevertheless. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. Influence of other markets: This is clearly an isolated market.400 6 13 4. Nevertheless. this margin was only slightly higher than expected for a market with these throughput attributes. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. Consolidated net revenue: No data was available for this market.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market.

and therefore.694 litres 9. retail pump prices are ultimately a reflection of rack prices. Accordingly. freight costs in this market are low. Saint John presents some unique characteristics for the market study. Since provincial taxes are among the lowest in the country. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. ex-tax prices were relatively high.extax MJ ERVIN & ASSOCIATES 69 . Average gross product margin was consequently high. and is capable of shipping and receiving wholesale product through marine facilities. Figure 35: Saint John NB .52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals.000 74.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . which for Saint John. That a major refinery resides in this market might suggest that these prices should be among the least in the country. it is an established rack point. do not differ markedly from any other rack point in the study group.27 ¢ 9.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. reflected in the high ex-tax pump price. Consolidated net revenue: was average for the study group. the Saint John retail market is relatively isolated from other retail markets of any significance. Nevertheless.095.ex tax Canada Average . In fact. this market fell within the expected range of gross product margins as a function of outlet throughput. resulting in lower than expected average outlet throughputs.79 ¢ 0. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. posted pump prices in the Saint John market have closely followed the 10-city average.Saint John NB population # of brands # of outlets outlets per 10. with or without a local refinery. Price history / Taxation: Historically.970 9 56 7.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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...... after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements.... .................................. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre.......... The viability of the Canadian retail gasoline sector as a whole may be somewhat better..................... particularly in comparisons of major urban markets to small...... 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs.....Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products.................. the profitability of the 481 outlets studied appears only marginal...................... 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.......................... reduced pump prices..... 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.......................... given the possibility of discounts from posted rack prices and potentially lower overhead costs................... are principally a reflection of changes in the underlying price of crude oil. 71 MJ ERVIN & ASSOCIATES 73 ........... ........................ when compared on an ex-tax basis... 33 Finding 13: From 1991 to 1996....... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences...................... a feature of most market-regulated commerce. In effect.................... while those with high Gross Product Margins tend to have low outlet throughputs............................................ 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US......................................... The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations............................................ Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads. petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied..... these ancillary operations contributed to a lower product margin and consequently............ 48 Finding 19: Based on published rack prices.................................. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre...................... .. the residual represented a net loss to the supplier.......... 50 Finding 20: For the 481 individual outlets studied....................... remote population centres................... ............. ...... 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences... which ensures a competitive product price for buyer and seller alike.......................................................... 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness..... residuals for outlets not studied may be better.51 Finding 21: Based on published rack prices and the individual outlet data...... and likely a negative impact on consumers......... ............... which in turn.

by all objective measures available to this study. over the long term. exhibited a diminishing trend (Finding 13). which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . In comparing several diverse markets. Canadian prices have been at or below US prices in recent years. The study presents such a model. On a national level. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. the very margins within which this industry operates has. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. and promotions are the other three). Rack and pump prices are determined in competitive marketplaces. This has not simply been a result of a decline in underlying raw materials costs. The Canadian retail petroleum products industry. in comparing Canada average (city) pump prices to those of the United States.Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. The resultant margins. place. when taxes were excluded (Finding 14). is mistaken. 1. Although an objective measure of competitiveness is elusive. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). 2. when measured in constant and nominal dollars. price is but one of four competitiveness “tools” available to marketers (product. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). Virtually all of the competitiveness indicators examined in this study relate to price. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. was observed (Finding 10). As described in this study however. each with unique dynamics. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. was shown to be strongly competitive: • A long-term decline in pump prices.

or even between Canadian markets with differing tax structures.3 cents or 9 percent (Finding 5). demand and other competitive factors existing at the time. crude costs accounted for roughly 34 percent (Finding 2). but even in such cases. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. and in some markets. particularly smaller ones. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. 3. experienced higher than average pump prices. Petroleum product taxes are levied at the federal. In applying such a model to the retail petroleum marketing industry. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. municipal levels of government. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). are thus a reflection of the state of product supply. taxation as an element of public policy is an area worthy of additional research. these markets have managed to sustain a certain level of viability and competitiveness. Taxation is a significant factor in the price of retail gasoline. The demonstrated exception to this is in markets directly adjacent to nearby US markets. Dealers were shown to have a variety of relationships with their supplier. but also rack prices and outlet performance. and do. vary considerably from one population centre to another. and product margins accounted for 3. it is important to understand that. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. and accordingly. retail petroleum markets are considered local (municipal) in scope. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). and in some markets. or 6 percent (Finding 6) of the 1996 average regular pump price. presents a competitive disadvantage to Canadian marketers. rack price and freight cost. measured against the average outlet throughput for that market. since this is the effective range of consumer choice. well over half of all outlets in Canada operate as lessees or independents. generally do not serve as competitiveness inhibitors. The latter two can vary considerably from one market to another.5 cents. refiner margins accounted for 5. This would entail the tracking of not only pump price. an exercise that consumers are unlikely to engage in. provincial. when the “outside” factors (tax. This implies that the competitive dynamics pertaining to these retail markets can. MJ ERVIN & ASSOCIATES 75 .even negative values. for example) were rationalized. taxation differences between Canadian and US markets. By contrast. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. and are a predominant cause of inter-regional pump price differences (Finding 16). Due to the localized nature of competition in the retail gasoline marketing sector. but given its magnitude. While some markets.

The pump price/margin model shows that in 1996. in a highly distinct. on a per litre basis. In fact. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. predictable seasonal pattern. which in turn is the principal driver of ex-tax pump prices. Viewed from this perspective. fluctuating prices are a strong competitiveness indicator (Finding 7). supplier costs and profitability. Sioux Lookout. incorporated with ancillary revenues and outlet costs.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). constitute a small portion of the retail pump price. This margin represents gross revenue (after wholesale product and freight cost) which. 5. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. when examined on the margin-volume model. Retail pump prices showed a corresponding seasonal pattern. and a loss in the case of urban markets. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3).Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. exhibited competitive traits typical of any of the study markets. Rack prices were shown to not significantly differ between major centres. While price wars are undoubtedly an indicator of competitiveness. 4. on the basis of price fluctuation alone. Demand for gasoline was shown to vary significantly according to the time of year. second only to the United States. and more price-stable markets such as Sioux Lookout. reflecting consumer demand behavior (Finding 15). a price-stable market. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. the absence of price war activity does not imply a lack of competitiveness. Retail gasoline marketing revenues. is available to provide for all retail marketing operations including outlet costs. Retail pump price changes showed a close relationship to underlying rack prices. dealer income. Pump price fluctuations can be an indicator of competition in the marketplace. when distributed these three ways (Finding 20). which in turn. This consolidated outlet revenue. showed a close relationship to underlying crude prices (Finding 11). MJ ERVIN & ASSOCIATES 76 . the Canadian retail marketing sector realized an average gross margin of 3. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. which represent the majority of Canada’s population base.

not price. Indeed. based upon an assumed posted rack price. in the long term these fluctuations are likely more reflective of market restorations. most outlets used in the 19-market study represent major integrated oil companies. assuming all other costs were unchanged. crude costs.6. and in turn. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. and the associated industry initiatives which are ongoing in nature. this industry sector would have realized profits of unprecedented proportions. Industry profitability is extremely sensitive to very small changes in pump price. Since 1991. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Nevertheless. Declining refiner and marketing margins. This trend has both resulted in. and has been a result of. intense competitive pressures in the downstream industry in general. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. Also. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. including: • • • improving production efficiency through refinery plant rationalizations (closures). serve as perhaps the most significant indicators of competitiveness in the downstream industry. Thus. and have resulted from. despite the predisposition of many observers to use them as such. and the marketing sector in particular. have caused. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). Also. 7. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). Thus. but to increases in underlying rack prices. both of which are beyond the direct influence of Canada’s oil companies. if Canadian average pump prices were only one cent higher than they were in 1995. these findings clearly show that pump price increases are ultimately linked not to increased profits. While these economics might appear to place this industry in a position of poor viability. Both the downward trend in margins. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. several competitive strategies. not excessive profits. MJ ERVIN & ASSOCIATES 77 . despite increases in tax content and crude costs (Finding 12).

In suggesting this approach however. That such a relationship should exist was not surprising. While competitiveness in most smaller markets was shown to be as active as in larger centres. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. the solution would be to encourage some dealers to exit the market. isolated markets face particular challenges: although found to be highly competitive. which could actually inhibit competition. more isolated markets are generally higher than in larger centres. A wide range of petroleum gross product margins were evident within the 19market study group. according to the margin-volume model. although this study provides comprehensive evidence of this. reducing the number of outlets may also reduce the number of competitors. This created some economic pressure to sell product at a higher pump price. other factors exist which contribute to relatively high margins and prices. poor outlet throughputs were generally the predominant factor. in order to generate sufficient revenue to cover the outlet’s fixed operating costs.5 million fewer litres of gasoline than a group A (major centre) station. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). Smaller. MJ ERVIN & ASSOCIATES 78 . there are three points to consider: • In very small markets. • • At first glance. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres.8. thereby improving petroleum volumes and ancillary revenues at the remaining sites. Although some smaller markets appeared to have higher gross product margins than larger markets. average pump prices were relatively high. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. When these margins were compared to their corresponding outlet throughputs. had petroleum margins which were commensurate with average outlet throughput for that market. Thus. virtually all of the 19 study markets exhibited similar levels of competition. regardless of size. which should. 9. it would seem that if local government in smaller markets were interested in lowering pump prices. most markets. Outlet throughput is a key determinant of inter-market pump price differences. and this study showed that gasoline prices were no exception. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. The costs of most consumer goods in smaller. When plotted against the margin-volume model. reduce pump prices.

This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). The historical record is clear however: since deregulating pump prices. Charlottetown. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). car wash. depressed petroleum revenues below that of outlet operating costs. MJ ERVIN & ASSOCIATES 79 . under the current PEI regulatory structure. has seen a decline in pump prices relative to other Canadian markets. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. The loss of employment represented by a station closure may be of some concern to smaller communities. the degree of price competition in the retail petroleum has in effect. and in turn. the Halifax market. This competition then. characterized by narrow product margins and relatively flat pump prices. does not appear to benefit in consumer terms. Retail ancillary operations are a critical element of petroleum price competition. and likely others in Nova Scotia. in order to build upon the findings in this study towards a full understanding of the dynamics at work. is both the cause and consequence of increased activity in ancillary operations. many national and local environmental regulations exist for good cause. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. and the traditional automotive service bay. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. As these findings show. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. is well beyond the scope of this study. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. 10. as marketers find even more innovative ways to attract market share. 11. and as such.• A full-serve retail gasoline outlet typically employs 3-5 staff. and the perceived effect on their markets. will likely preserve a highly competitive petroleum market. Also. The federal Competition Bureau for example. Convenience store. are an acceptable limitation on pure competition (Finding 8). is viewed as an agency which exists to the benefit of industry and consumer alike.

Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. 1. Public perception measurement. and the converse image held in much of the public domain. 2. and the nature of competitiveness influences. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. petroleum marketing competitiveness. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives.This study proposes rather. direct regulatory interventions may have an adverse effect on competitiveness. Develop cooperative industry research into marketing sector competitiveness issues. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. that where a healthy competitive climate exists. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. as it does in the Canadian petroleum marketing sector. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. A regular comprehensive competitiveness evaluation. Improve public understanding and awareness of competition in the petroleum marketing sector. in a simple format designed for consumers and legislators. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . possibly to the detriment of the consumer. margins and competitiveness factors. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. This should be in the form of a quarterly summary of price trends and related measurements. not inhibit.

by industry. using Canadian and foreign selected markets. and in particular. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. using Canadian and foreign selected markets. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. and regulators alike. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. and issues/opportunities facing such markets. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. along the lines of the model used in this study. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. • • • • * * * Better understanding of this industry. using Canadian and foreign selected markets. consumers. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. MJ ERVIN & ASSOCIATES 81 .

Appendices MJ ERVIN & ASSOCIATES 82 .

a service provided in addition to the basic retail petroleum sales operation.a petroleum marketer who is not involved in the refining of petroleum products. Independent Petroleum Marketer . CPPI . These product taxes include Excise tax. and commission dealers. lubricants. municipal tax levees. but inclusive of any corporate taxes on earnings. Integrated Oil Company .a generic term referring to a retail outlet operator. Margin . provincial pump tax.Canadian Petroleum Products Institute.. independent dealers. safety and business issues. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. for example..the retail price of gasoline that would be displayed if all product taxes were removed. and in some regions. diesel. Usually expressed on a per-unit basis. Major Oil Company . Grade Differential . an association of petroleum refiners and marketers. Lessee . etc. The ex-tax pump price is exclusive of these taxes.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. the regular unleaded pump price. Dealer . service bays.(for the purpose of this study) the cost. in cents per litre. There are several modes (see below) of dealer operation. GST. which serves as the voice of the petroleum products industry in Canada on environment.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. etc.a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. Ex-tax Pump Price . and included in the retail pump price. such as lessees. Downstream .the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. Marketer .the difference in pump price between a premium or mid-grade of gasoline vs. and therefore purchases its supply of petroleum product from an outside source. Excise Tax . car wash.I Glossary of Terms Ancillary service . such as convenience goods. Distribution Costs .a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. health. MJ ERVIN & ASSOCIATES 83 . generally expressed in cents per litre. currently established at 10¢ per litre. of transporting petroleum product from the rack point to the final point of sale.an organization who sells refined petroleum products to end-use consumers. such as a retail gasoline outlet. such as a major oil company or regional refiner/marketer.a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry.

lessee.an organization who. it is usually based on the market-driven rack price.within the context of retail gasoline marketing. or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. an association of upstream and downstream oil companies and related organizations. Rack Point .the type of contractual relationship between the supplier and the dealer (outlet operator). Regional Refiner/Marketer . the supplier has initial title to the petroleum product as it leaves the rack point. Supplier . Refiner . Transfer Price . the raw material from which petroleum products are manufactured.Petroleum Communication Foundation.the wholesale price posted at the rack point. and independent dealer. commission dealer. MJ ERVIN & ASSOCIATES 84 . is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products. Throughput .Mode .a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. Upstream . usually per month or per year. Rack Price . with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. PCF .the segment of the oil industry involved in the exploration and/or production of crude oil.the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. these can be broadly classified as company operated. In the retail gasoline sector. This may be at a refinery loading terminal.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period. manufactures (from crude oil) a range of petroleum products suitable for consumer use. Although in theory the transfer price could be set at any arbitrary value.the point at which title to refined product is transferred from the refiner to the supplier.

2 112.1 117.5 120.1 105.2 121.5 94.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.0 104.3 1992 128.4 45.5 112.2 109.8 130.3 27.4 104.1 40.6 91.7 95.1 151.1 144.2 30.2 99.7 118.8 135.2 45.4 34.5 126.9 26.1 87.5 49.1 146. MJ ERVIN & ASSOCIATES 85 .9 118.4 152.4 53.4 27.1 120.3 40.8 47.4 104.0 102.6 133.0 1988 108.0 97.9 26.1 120.4 57.5 111.3 119.0 42.0 135.0 32.2 133.6 92.3 55.3 122.2 142.1 117.0 111. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.2 92.5 25.8 106.3 151.4 124.5 100.6 136. using a weighted (by provincial gasoline demand) 10 city average.4 110.3 125.3 139.3 19.0 93. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.1 126.1 167. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.4 29.2 127.9 97.3 58.1 104.0 93.6 107.7 96.8 93. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.3 160. Nominal (¢/litre) (2) RUL Annual Price.8 1987 104.1 104.5 115.2 39.0 1991 126.3 52.9 1994 130.6 51.3 132. No.1 48.8 108.8 28.5 124.1 26.9 155.4 134.7 124.8 132.7 132.0 30.8 104.1 103.1 115.9 108.8 94.3 96.9 1993 130. Nominal (¢/litre) (2) RUL Ex-tax Price.4 97.4 120.0 19.0 115.5 145.2 45.1 1990 119.7 123.7 29.4 136.5 30. 62-010: Consumer Prices and Price Indexes.4 122.7 22.2 31.9 115.7 122.2 49.6 122.3 141.9 122.3 1989 114.7 54.1 97.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.9 1995 133.3 115.8 95.7 30.2 20.2 50.3 134.

8 15.5 5.3 22.6 54.0 24.2 65.1 13.5 57.5 7.2 7.9 25.9 25.2 13.0 28.7 14.9 7.1 13.6 23.4 58.9 53.7 29.4 9.6 28.1 29.1 16.5 19.6 6.7 14.7 4.5 10.6 20.8 24.7 25.1 22.5 56.1 52.0 24.2 14.7 19.7 18.5 22.4 24.0 10.7 63.0 25.8 11.0 8.6 54.3 54.3 13.3 56.8 33.0 16.6 26.2 27.8 9.0 16.7 8.1 17.5 10.4 31.9 6.1 18.9 14.8 57.8 13.0 26.9 7.1 25.8 22.3 14.8 8.9 30.0 20.0 24.6 23.3 25.9 13.6 26.5 15.5 27.9 23.5 11.4 14.9 8.6 5.3 6.3 42.5 23.9 15.9 55.4 56.0 26.7 24.2 63.6 18.4 14.7 14.9 12.6 7.8 55.7 14.0 16.0 12.2 5.3 22.2 23.4 26.9 21.8 21.3 13.1 24.2 25.1 7.0 24.5 7.0 5.2 22.4 13.1 53.9 22.5 Gross Marketing Margin Gross Refiner Margin 53.9 26.2 12.9 53.8 21.5 14.8 16.9 26.4 14.4 26.0 25.5 32.2 16.3 58.5 16.7 32.3 26.4 13.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.1 39.4 34.8 23.7 23.Table B: Key Price / Margin History .2 27.4 55.5 8.2 16.8 14.2 26.3 Tax Content 23.3 56.0 15.7 4.1 19.3 23.2 7.7 31.2 27.3 17.9 7.3 5.7 13.7 29.5 27.6 25.9 24.2 7.3 4.0 24.5 25.3 54.0 55.8 23.4 33.2 13.1 16.3 9.9 6.6 54.4 26.5 30.2 8.2 25.0 22.2 56.4 24.4 21.3 13.2 24.8 30.8 29.2 4.1 9.6 9.3 66.1 21.9 6.5 35.9 58.0 54.7 18.1 13.8 53.4 12.2 15.3 54.6 4.7 19.8 14.0 7.4 31.3 13.0 14.4 29.2 23.8 14.0 13.2 13.7 6.9 9.1 5.8 8.9 11.6 13.3 57.2 26.1 23.2 29.9 23.0 33.6 13.6 8.5 14.7 7.6 26.7 15.1 23.0 9.2 21.9 14.0 16.9 4.1 22.8 25.7 7.4 14.8 53.9 17.7 4.4 32.3 24.2 13.9 25.1 16.9 25.9 25.2 41.4 57.1 23.4 30.4 20.3 15.5 28.9 54.8 28.5 23.3 6.7 Downstream Margin 14.8 26.7 29.6 25.2 6.5 6.6 21.0 52.8 55.4 8.3 13.0 24.2 6.3 26.8 14.0 7.0 7.0 24.3 12.7 14.2 7.9 4.4 MJ ERVIN & ASSOCIATES 86 .4 53.5 54.7 33.4 22.7 12.9 55.5 26.4 7.1 16.5 33.0 26.9 56.2 11.7 34.5 26.7 28.1 53.1 7.7 39.3 15.9 23.7 7.2 14.5 23.9 56.0 4.1 18.9 31.7 58.5 31.6 24.6 52.8 26.4 15.

3 27.9 26.1 11.6 3.3 13.4 21.9 11.2 7.1 26.4 6.0 26.0 53.5 15.3 26.1 11.7 13.8 17.4 6.9 19.0 27.7 26.1 57.3 21.5 17.7 14.3 26.7 3.2 11.7 14.7 51.0 52.0 28.2 20.1 16.2 25.4 25.9 3.6 4.6 21.1 6.1 15.8 6.4 6.3 4.7 5.3 53.1 61.1 3.6 4.0 14.9 12.2 7.0 6.0 12.9 49.7 53.4 21.9 Downstream Margin 12.1 6.1 54.8 28.8 4.3 21.9 6.9 12.1 Gross Refiner Margin 7.3 23.2 49.7 18.2 4.4 28.5 54.3 58.5 3.5 21.1 26.5 2.7 8.1 11.6 27.2 26.6 16.7 13.3 4.5 13.0 28.6 17.7 6.8 50.0 24.2 14.8 52.1 10.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .5 20.0 28.5 6.9 29.4 15.1 11.3 9.0 6.5 6.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.0 25.8 28.0 54.4 5.2 26.0 5.0 28.2 14.3 9.8 29.0 25.3 26.1 6.2 15.3 12.5 25.3 8.8 23.5 7.3 26.0 12.2 Gross Marketing Margin 4.3 28.9 14.5 21.9 27.2 26.5 5.7 25.3 6.2 4.6 20.0 57.0 9.4 26.3 9.5 19.1 51.9 14.9 4.2 28.9 23.7 52.2 20.7 24.4 6.3 26.7 29.5 14.6 15.6 53.3 25.4 4.4 26.6 9.4 7.0 26.9 49.7 7.1 51.0 29.5 11.9 28.7 53.2 7.1 15.4 26.0 28.5 55.6 11.4 16.6 5.2 25.6 19.7 5.3 26.3 55.6 23.7 15.6 12.5 23.5 7.1 24.5 53.8 27.9 27.9 4.3 4.6 15.2 23.5 3.0 5.2 14.7 6.7 25.1 20.4 11.9 5.7 24.4 51.7 16.2 27.5 11.3 54.4 32.2 54.3 26.7 7.1 6.4 24.7 23.5 9.2 9.3 26.1 14.9 58.8 49.5 4.4 13.5 21.1 55.8 25.1 15.4 26.8 23.5 5.3 7.7 12.1 14.3 28.6 10.1 Tax Content 26.2 5.8 20.4 25.6 20.1 14.3 26.7 53.7 26.9 29.7 3.0 14.8 22.9 17.1 26.5 6.5 13.2 12.0 9.1 21.0 11.8 10.6 10.9 9.5 28.0 6.6 53.5 19.3 7.2 7.

878 2.141.2 23.370 2.133 3.218 3.732.669.641.335 2.7 21.1 23.7 29.8 33.931 3.5 27.2 27.886 3.294.9 29.979 3.2 22.480.716.176 2.897.7 24.246 2.958.346.859 2.254.801.818.181.9 26.822.490 3.4 22.256 2.880 Canadian Retail Gasoline Sales (M3) 2.437.968 3.329 3.301.615 2.933 3.379.9 17.5 32.8 22.8 21.709 2.609.323 3.108.291.725.000 3.934.295.045.270 3.102.626.883.871 2.827 3.714.2 24.030.521 2.1 29.647.960.970.427.8 MJ ERVIN & ASSOCIATES 88 .250.131.572 2.122.206.7 24.188 3.884 2.132.218.0 20.7 26.2 20.462.8 28.558.781.299 2.589 3.298 2.461 3.804 3.381 2.785.967 2.720 3.646 2.667 2.661 Canadian Domestic Gasoline Sales (M3) 2.693 3.5 28.510 3.744.4 21. Demand.095.613 3.876.801.476.130 3.897 2.532.176 3.020 2.333.3 23.979 2.677 3.7 29.976.592 2.220.354.8 30.202 3.377.604 2.047 3.051 3.890.029 2.2 29.941 2.412 2.022.067.085.439.4 21.932 2.773.180.802 2.544 3.457 2.073 2.808.501.027 2.112 2.140.502 2.430.3 24.338 3.473.628 3.003.037 2.235 3.422.1 23.630.636.2 26.0 28.015 3.179 3.897 3.450 2.799.180 3.456 2.2 26.612 3.373.168 2.9 23.039.6 21.199 2.2 23.285 2.998.729.599 2.322 2.9 22.498.083.796.369 2.251.930 3.748 2.830.469 4.269 2.279 2.887.7 18.840.5 31.191 2.735.045 2. Inventory.151.767.844.281 2.565.160 3.853.4 32.661 Canada Avg ex tax RUL pump price (¢/l) 39.044 2.313 2.485 2.9 19.263.5 27.627 2.268 2.8 29.475 2.995.853 2.833 2.930.120.415 2.4 25.202.8 23.894.625 2.771 3.839 2.369.331 2.509 3.620 3.748.893.687.566.245.056 3.389.3 23.429 2.025.180 2.682.3 22.141 3.035 2.798.9 21.403 2.287 2.831.804 2.326.743 2.9 23.7 29.739.011 2.5 22.813 2.1 21.682 3.209.841 2.765 3.443 2.324 2.002.1 23.Table C: Canadian Supply.2 27.316.2 21.283.782 3.141.621.864 2.297 2.671.9 31.4 29.710.952.301 2.5 19.8 27.122 2.315 2.192.458.161.081.869 2.4 31.142.874 3.843.767.600.889 3.775.900.047 2.9 23.193 3.075.651 2. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.281.1 22.479 2.3 22.095 2.970.070.587.518.619 2.6 23.114 3.5 30.644 3.8 23.853 3.637 3.672.130 3.684 2.378.101 2.636.938.8 26.345.499 2.193 3.633.4 24.873.2 27.089.254.045 2.904.6 28.101.164.232 3.455.688.973.642.752 2.300.508.810.564 2.865.666.0 24.516.321.970 3.255 3.5 25.7 28.286.322 2.262.733 2.580 3.703 2.311 3.287.361.322 3.709 2.7 34.823.026 2.969 2.366 2.935 3.242 2.5 23.3 Canada Avg RUL Rack Price (¢/l) 35.254 2.3 26.070 3.9 26.113.633 2.622.477.437.152 2.779 2.325 2.409.1 16.299.429 2.097 2.4 24.558.301.416 2.019.182 3.966.7 31.6 26.9 30.287 2.2 27.411.6 24.837.654.441.673 2.201.

649.2 25.638 2.825.9 22.797.675 2.2 26.1 24. demand.363.0 26.679.415 2.346 2.8 25.830 3.382.919 2.9 27.7 19.864 2.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.840 2.149.324 2.4 20.516 3.336.390.082.970.386 3.906.703 3.165.8 28.130 3.566 3.617 2.656 3.077.607.997 2.006 3.614.170 3.539.214 2.8 20.123.904.5 25.055 2.0 25.148.2 25.376.483.222 2.930.195.717.0 25.606.068.426.7 22.671.999 3.791 3.386 3.344 3.469.264 2.0 26.442 2.714 2.141 2.370.537.669 2.264 2.4 25.773.799 2.4 26.8 24.480 2.7 Canada Avg RUL Rack Price (¢/l) 20.6 20.8 21.315.5 source: Statistics Canada (production.198.184.597 2.796.074.5 21.170 Canadian Retail Gasoline Sales (M3) 2.667 Canadian Domestic Gasoline Sales (M3) 3.936 3.994 3.0 24.658.261.1 21.414 3.940 2.467 2.785.097.6 20.620.7 21.521 2.037 3.593. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .660 3.317 2.519.961.324.648 3.048.857.881.753 3.692.179.198.244 3.219 Canada Avg ex tax RUL pump price (¢/l) 27.984 3.871 3.977.005 2.863.155 2.965.338 2.198 2.4 26.204.250.889.649.928 3.205 2.5 21.644 3.182.601 3.320 3.806.555.505 2.986.9 29.294 3.112 3.

2 46.9 64.8 53.9 61.9 61.9 52.5 59.4 56.4 56.9 54.8 52.5 60.5 58.4 65.4 56.5 55.9 44.3 52.7 62.9 54.0 61.7 54.6 48.2 54.0 62.9 54.4 50.8 53.9 61.6 49.7 51.4 53.7 51.5 58.9 51.5 56.9 61.3 48.9 52.1 56.9 49.9 51.9 45.6 53.6 59.4 55.8 54.0 61.6 52.6 55.5 60.9 52.5 58.5 54.0 61.1 52.3 51.4 56.8 52.9 53.9 50.5 52.9 56.5 58.4 46.5 60.2 50.2 62.0 61.0 61.9 59.7 54.4 54.9 61.5 56.9 54.3 48.8 57.7 65.4 55.9 56.3 54.7 62.5 56.4 Winnipeg 49.8 50.5 47.5 60.3 50.7 44.7 65.1 44.0 59.5 58.7 45.4 53.9 51.2 46.7 57.9 47.7 57.8 55.0 52.5 56.5 54.6 47.5 50.5 57.5 59.7 45.2 62.8 64.5 57.9 58.9 52.5 61.2 62.6 46.5 52.1 49.9 56.1 41.4 61.1 50.4 63.0 62.9 48.2 55.7 52.9 56.4 46.8 47.4 54.5 58.0 39.3 55.9 53.7 48.7 53.9 56.6 62.9 51.1 43.9 54.8 45.8 50.5 57.9 62.8 57.0 61.3 61.6 55.9 63.5 45.8 48.4 46.9 55.4 47.9 56.8 56.5 47.4 55.4 56.3 55.5 55.9 58.5 58.9 53.8 Thompson 59.2 46.2 51.4 48.9 55.1 49.1 59.5 59.5 51.3 62.1 55.8 53.9 55.9 58.5 58.3 49.8 51.0 62.2 50.6 47.5 57.3 56.5 51.5 49.9 56.5 57.7 65.0 52.2 48.9 54.0 50.9 54.7 53.8 59.7 65.5 45.9 44.4 52.5 62.9 64.2 50.3 49.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.5 57.1 52.4 52.9 64.8 56.5 57.9 61.7 52.5 60.7 54.2 63.4 52.9 52.9 53.5 61.6 58.2 59.2 57.2 47.8 48.9 58.9 47.7 50.4 57.8 53.1 55.9 53.6 54.1 53.4 55.2 54.1 44.5 56.2 56.6 53.8 41.2 Nanton Peace River Regina 49.8 49.9 49.2 62.8 56.5 57.9 56.4 56.8 52.8 52.9 57.5 59.7 63.4 59.9 52.2 43.5 47.2 58.5 53.9 58.8 52.2 65.6 56.9 57.2 62.9 64.8 59.1 55.8 48.3 52.2 51.4 52.5 58.5 59.5 60.5 51.1 50.4 61.2 62.0 58.9 53.4 53.8 47.5 58.3 52.8 56.7 65.9 59.4 52.5 59.8 44.0 59.9 46.9 62.2 62.2 51.9 53.5 57.5 Vancouver 53.7 White Rock Calgary 45.3 54.7 50.9 56.0 54.0 57.4 55.9 53.8 56.8 48.9 52.4 58.9 56.0 48.1 53.2 62.6 51.4 49.9 53.4 54.0 Sioux Lookout 62.7 53.6 46.4 58.9 55.0 55.5 53.3 52.7 49.9 49.5 51.5 59.6 48.Table D: Pump Price History .9 64.6 50.5 57.5 59.9 47.6 58.8 56.5 58.3 52.6 54.6 44.2 61.5 46.9 53.5 53.5 59.9 56.2 62.5 51.7 48.0 44.4 61.3 50.9 47.0 61.2 54.7 46.5 57.1 49.5 57.5 57.2 65.4 57.6 50.7 51.6 48.0 46.9 53.3 42.4 55.3 59.1 60.9 54.9 MJ ERVIN & ASSOCIATES 90 .6 47.5 58.

2 54.5 56.1 58.7 53.1 53.7 58.9 60.1 54.5 55.9 61.5 61.7 54.1 57.0 57.2 59.4 58.8 52.7 54.1 52.6 56.5 56.1 54.6 51.5 55.8 59.9 64.1 56.9 49.1 55.3 56.2 58.0 52.7 51.3 59.3 57.1 59.2 57.6 54.7 60.0 47.6 63.2 57.5 59.2 55.7 57.9 64.9 55.4 54.2 50.6 54.5 52.4 60.0 50.6 53.3 55.2 Chicoutimi Gaspé Saint John 60.4 53.2 51.8 51.1 49.8 60.7 54.0 47.9 57.0 59.3 61.9 54.9 57.4 52.5 58.2 61.2 61.8 60.6 56.6 53.0 52.0 54.2 49.0 56.8 61.6 49.8 50.0 55.6 53.2 55.6 54.9 56.8 57.5 55.7 54.4 57.0 54.0 55.1 55.1 61.6 55.6 58.6 55.7 56.4 57.7 64.6 59.8 53.1 54.0 61.0 60.4 53.9 56.0 55.5 63.5 64.3 53.5 54.7 54.5 56.8 49.0 60.0 57.6 54.9 52.8 49.0 53.0 49.0 51.9 54.6 63.7 44.2 53.5 52.5 56.1 56.0 59.7 56.7 51.1 51.6 52.8 56.6 49.9 49.0 59.1 60.4 58.6 52.3 59.5 52.7 56.6 57.2 56.5 Ottawa 58.8 63.5 51.8 52.4 55.8 Halifax Charlottetown 60.5 61.9 61.2 61.6 50.9 55.5 MJ ERVIN & ASSOCIATES 91 .7 54.9 61.9 49.2 56.1 60.3 53.6 50.5 57.6 54.5 51.8 54.7 50.7 51.5 57.2 55.3 62.3 54.4 50.5 51.8 50.2 52.6 59.6 52.8 55.2 53.1 54.9 56.4 57.3 56.7 55.7 46.9 55.4 49.8 54.2 57.7 57.3 49.2 56.3 55.5 59.4 54.9 55.3 53.5 57.1 51.5 53.7 52.2 58.2 57.3 52.5 63.9 63.2 54.2 54.Table D: Pump Price History .0 48.0 53.6 56.9 50.3 53.0 55.5 51.8 55.4 54.3 55.8 57.1 56.3 54.3 49.1 Toronto 52.4 45.1 61.2 58.6 55.9 53.2 60.6 58.6 50.6 58.8 55.3 58.9 53.7 56.7 57.5 54.7 49.2 57.9 57.8 54.9 53.2 55.3 54.3 55.1 54.9 54.1 51.0 52.4 58.6 53.6 56.4 51.1 61.4 58.5 61.5 48.9 61.4 57.2 56.2 56.2 55.9 55.7 53.0 57.9 62.3 54.4 54.3 51.0 60.5 67.6 60.3 53.3 56.9 55.1 55.6 58.4 57.6 61.8 47.8 57.2 59.7 56.9 60.6 55.9 49.3 59.3 55.5 60.3 56.5 54.2 53.9 58.4 58.6 61.8 55.7 52.9 53.7 52.5 57.7 51.1 57.5 52.2 49.0 57.6 55.5 60.4 51.8 54.6 54.5 53.3 52.1 58.6 55.4 55.2 52.3 55.1 53.7 48.6 59.9 61.1 54.6 63.4 51.3 52.2 56.8 50.1 53.0 52.0 48.8 55.8 56.5 54.4 54.3 54.2 49.4 54.9 53.5 53.4 57.0 50.2 60.6 Canada Avg 55.6 52.0 55.6 51.4 54.2 57.3 60.1 48.0 60.6 55.8 53.1 57.1 58.2 56.0 52.4 53.5 53.8 55.7 48.9 57.0 58.7 57.4 54.2 52.0 51.3 54.2 51.0 52.0 50.6 52.9 64.9 56.3 54.9 55.9 58.4 53.5 54.2 Montreal 63.3 59.9 55.4 58.0 55.0 56.8 61.5 64.1 55.1 59.7 57.2 57.9 55.1 53.1 53.2 54.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.2 54.5 57.2 51.8 55.0 61.0 54.4 52.2 57.3 54.6 54.3 52.5 54.9 55.5 59.7 58.3 54.7 47.6 51.3 56.5 63.2 57.2 55.5 54.6 52.6 58.1 58.5 56.2 57.2 56.0 54.8 55.8 53.7 59.1 55.1 52.1 55.7 59.7 56.2 49.0 53.9 60.0 56.6 52.1 52.9 51.

3 30.2 22.3 29.3 30.9 25.2 29.7 27.9 28.4 31.3 29.6 Aug-95 30.0 25.6 23.1 25.4 24.0 24.3 29.3 26.4 Dec-92 31.1 27.3 Feb-95 26.8 25.3 Jan-93 30.7 30.9 29.3 28.3 26.9 27.7 26.0 31.8 27.0 31.4 31.8 Dec-93 26.4 29.2 28.2 23.7 Jan-95 27.4 30.5 29.5 24.6 23.7 28.8 27.3 29.7 28.3 28.5 26.3 27.0 21.4 Mar-92 28.4 27.0 32.1 25.4 24.5 25.2 Jun-94 31.9 Oct-94 32.9 28.4 27.3 26.7 25.5 23.4 26.5 29.6 May-95 29.6 29.9 28.5 24.9 24.7 Sep-94 32.5 Jul-94 29.7 26.1 26.2 28.8 28.5 23.4 25.7 30.6 24.9 30.5 24.8 24.8 24.4 31.8 27.4 30.7 26.5 27.4 Jun-95 30.6 22.2 32.4 22.8 27.3 21.7 24.4 29.0 23.0 24.9 21.4 29.0 Apr-92 30.8 27.4 25.6 27.7 29.1 27.2 29.6 30.9 31.7 26.4 22.7 27.9 29.6 29.8 23.0 Jun-93 26.1 24.1 30.5 29.2 24.1 Apr-94 29.3 29.8 Toronto extax 26.4 23.5 29.3 29.9 27.7 30.0 27.5 26.4 29.6 24.0 25.2 Nov-93 27.9 26.4 25.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.9 20.7 28.6 26.4 MJ ERVIN & ASSOCIATES 92 .1 20.6 29.9 24.2 Dec-94 26.7 Jan-92 31.2 24.3 30.2 27.4 28.6 26.4 25.3 33.3 23.9 30.4 30.1 31.2 28.4 27.1 23.1 25.6 25.1 31.0 28.4 22.3 24.7 Aug-92 24.4 23.8 24.8 Jan-94 25.7 28.7 30.0 23.9 24.3 28.0 26.3 29.3 29.8 25.9 26.3 26.4 31.5 21.9 29.0 Oct-93 28.9 21.3 29.8 25.6 26.0 26.3 24.0 May-92 28.2 Apr-93 28.4 21.7 24.0 26.6 Mar-93 28.2 24.3 23.1 19.6 26.5 27.3 30.8 26.0 27.3 Dec-95 Edmonton Regina extax extax 27.9 28.6 23.9 25.3 Jul-92 31.4 27.9 23.4 28.1 Apr-95 30.0 29.9 27.9 Aug-93 30.5 27.5 Oct-92 30.8 26.5 Oct-95 30.6 29.4 30.4 25.1 24.2 26.7 28.5 27.4 20.9 24.9 26.8 29.Table E: Ex-tax Pump Price History .6 23.0 23.0 23.7 29.6 27.9 23.4 23.8 31.9 30.3 28.6 30.5 Aug-94 28.8 29.4 20.6 26.9 25.7 Winnipeg extax 27.2 26.5 21.1 22.7 Sep-95 30.1 28.5 Sep-92 29.4 29.6 Sep-93 28.5 29.8 26.6 26.6 27.1 26.3 31.8 26.3 28.2 24.1 Mar-95 29.7 29.7 29.4 29.5 28.7 31.8 27.6 27.2 Nov-94 29.1 25.0 May-93 29.1 28.6 25.4 28.7 Mar-94 28.2 25.8 28.8 22.3 26.6 Jun-92 32.8 29.6 30.0 25.1 30.8 29.0 24.9 25.5 27.2 26.7 30.4 31.2 25.5 Feb-92 28.3 24.3 May-94 28.9 27.8 28.9 24.4 31.6 21.9 Jul-93 28.6 26.9 25.6 26.2 27.2 Nov-92 31.1 Feb-93 29.6 28.9 26.4 27.8 24.8 Feb-94 24.4 31.3 29.4 20.5 Nov-95 30.1 24.2 26.0 23.6 28.8 21.4 29.5 Jul-95 30.2 28.3 27.6 22.7 28.3 32.1 22.0 22.

2 21.7 32.3 28.2 30.4 31.0 34.9 30.0 33.3 30.1 32.2 33.2 22.6 31.6 29.8 27.7 28.5 31.8 28.5 26.9 31.1 29.2 27.1 28.9 35.2 26.2 27.9 26.9 30.2 25.3 27.5 33.7 30.5 30.7 24.2 28.2 32.8 23.6 32.0 33.8 29.0 34.4 33.3 35.0 33.0 26.8 28.3 34.0 28.3 31.2 30.3 25.3 25.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.2 27.8 Canada Avg extax 29.8 30.4 22.1 32.3 29.1 22.9 26.0 33.4 32.2 36.1 29.7 32.6 34.0 26.5 25.9 33.2 26.8 33.7 34.9 29.3 26.7 26.7 28.4 36.9 27.2 33.1 24.0 32.7 26.9 26.4 24.1 24.1 34.2 26.7 22.8 23.4 33.6 32.8 33.7 27.2 22.3 25.6 29.0 28.9 29.6 28.5 28.7 29.6 23.5 25.8 26.8 28.5 27.8 26.5 27.4 25.3 29.2 27.1 25.2 32.0 29.2 23.8 25.6 36.8 29.9 29.6 26.4 33.1 30.8 30.1 34.9 30.5 25.2 27.3 29.6 27.9 32.0 34.3 23.4 26.4 24.8 24.5 36.4 34.5 30.6 28.8 27.2 27.6 34.5 27.0 29.2 22.0 33.5 25.6 32.5 27.6 36.5 32.8 27.8 26.3 31.7 28.9 32.5 24.8 32.7 26.0 30.6 33.7 27.2 36.1 Montreal extax 31.2 27.9 30.1 30.2 26.9 37.9 28.5 28.5 29.2 25.4 26.9 31.9 29.7 28.6 24.3 31.7 29.4 25.6 26.3 22.5 24.7 33.1 34.7 30.3 34.5 28.8 28.6 25.6 33.8 28.9 29.1 28.0 32.6 27.9 27.7 32.8 32.1 24.7 23.0 23.9 27.5 30.2 25.2 Saint John Halifax extax extax 34.6 26.9 24.4 28.1 26.4 31.3 31.4 33.0 25.3 28.3 28.1 23.0 36.7 27.5 33.3 29.0 30.6 22.6 25.8 26.2 27.2 25.0 26.6 27.4 25.9 23.0 36.1 32.0 25.3 26.1 31.5 25.2 27.1 30.0 23.7 Quebec extax 32.4 33.8 29.5 28.3 27.7 26.5 25.0 28.9 32.8 29.3 28.7 24.7 24.4 36.9 33.9 27.7 24.2 30.0 25.8 36.0 29.0 31.1 29.6 28.7 34.0 27.2 34.8 32.6 Charlottetown extax 36.3 25.5 31.8 29.9 32.6 28.2 26.8 30.4 28.6 32.7 26.4 27.3 26.4 25.8 28.2 24.7 27.6 28.1 32.7 24.6 32.9 30.2 22.2 29.9 29.3 31.2 28.2 32.3 34.Table E: Ex-tax Pump Price History .7 23.8 25.5 34.8 27.8 23.8 32.3 28.8 25.7 28.4 21.9 27.8 23.7 MJ ERVIN & ASSOCIATES 93 .6 23.2 24.7 23.5 33.1 24.8 26.4 26.8 25.1 26.0 28.9 28.6 31.4 31.3 24.4 32.9 29.0 28.3 29.4 32.7 25.5 26.2 28.7 26.3 33.6 26.

3 22.0 22.4 21.2 16.8 22.9 20.1 20.2 22.2 21.1 24.7 22.0 23.6 19.0 22.9 19.9 17.5 19.9 18.3 22.1 21.8 23.7 22.0 21.8 Ottawa rack Thunder Bay rack 20.3 20.4 20.3 23.4 21.5 21.6 19.3 17.1 22.4 22.6 25.6 19.5 20.1 21.4 22.7 19.0 23.7 17.4 21.8 20.0 21.0 23.6 20.2 23.8 22.4 21.8 23.8 22.6 18.1 21.4 21.0 19.3 24.6 22.1 21.1 23.7 22.7 17.5 22.7 22.4 20.5 22.8 22.8 18.6 21.0 20.1 15.9 18.9 20.0 23.3 19.3 23.5 22.3 20.6 20.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.8 19.4 21.1 15.8 21.4 23.9 20.3 21.3 18.0 21.4 18.5 21.0 19.1 22.4 19.8 19.8 23.5 17.8 27.7 20.8 19.9 24.1 22.0 19.2 18.5 22.8 23.9 22.7 23.1 22.2 20.2 19.0 20.6 20.1 19.7 22.5 24.7 17.2 18.9 22.4 22.8 23.7 MJ ERVIN & ASSOCIATES 94 .1 20.2 18.0 23.5 27.6 23.6 19.2 20.2 22.3 23.3 22.4 23.1 22.1 23.9 22.5 19.4 22.4 20.1 20.2 23.1 21.1 Halifax rack 20.2 20.5 21.5 21.7 21.2 Quebec city Montreal rack Toronto rack rack 19.2 20.4 21.1 19.5 22.3 21.6 19.9 21.0 21.8 20.1 21.5 20.3 22.2 21.2 21.8 21.4 21.8 20.6 25.7 19.1 20.6 23.0 22.2 18.0 22.0 24.5 21.6 23.3 20.4 22.5 18.2 16.5 17.0 23.2 23.7 22.4 22.3 19.5 23.1 18.3 21.5 23.6 21.2 21.4 22.2 21.7 23.5 24.0 21.5 21.6 20.1 20.7 22.3 19.3 24.1 19.7 16.7 20.3 21.9 21.1 23.1 21.3 17.2 29.0 21.2 19.4 22.7 21.7 21.4 21.9 22.7 21.4 20.8 20.4 21.4 20.3 26.6 23.1 22.9 21.4 22.8 20.8 21.0 23.4 23.7 21.0 22.2 20.2 21.7 18.1 16.2 21.9 22.8 21.9 18.5 21.2 18.1 22.2 16.3 19.9 18.4 24.Table F: Rack Prices .9 22.3 23.3 23.5 24.0 22.6 23.2 22.8 18.6 20.5 20.0 23.7 22.4 21.2 19.3 17.5 17.4 22.4 22.5 22.4 21.4 17.6 25.8 25.7 21.8 20.7 20.2 23.3 18.3 23.3 20.4 15.7 22.8 23.6 20.5 26.7 18.3 18.1 21.1 20.0 21.6 23.6 20.3 23.5 18.6 19.9 21.8 24.3 21.9 21.2 21.9 23.4 21.8 22.7 21.8 21.1 20.8 18.9 21.4 23.2 17.8 23.8 18.5 23.5 20.5 21.9 23.8 21.9 22.9 25.2 20.1 20.8 19.

2 18.9 21.9 18.9 19.5 24.1 23.0 22.2 20.1 23.3 22.6 23.0 22.4 23.5 21.4 23.4 20.7 25.5 MJ ERVIN & ASSOCIATES 95 .5 19.2 23.4 24.4 24.1 21.1 21.5 22.5 21.8 23.7 21.5 18.7 22.2 20.1 23.4 21.9 19.9 17.0 17.1 23.4 22.7 17.4 19.6 23.7 23.5 23.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.0 23.6 23.5 21.5 21.8 21.6 21.6 17.7 21.8 21.5 24.4 22.1 25.2 23.8 20.0 22.0 21.8 18.2 21.0 20.3 21.5 21.2 20.1 18.8 25.6 17.6 24.0 21.3 23.2 19.9 21.3 22.5 22.7 21.6 23.7 21.2 24.6 21.0 22.2 22.5 23.5 20.6 25.0 23.9 23.9 20.1 19.3 17.8 22.7 22.7 20.3 19.1 22.6 21.9 20.1 20.9 21.1 24.2 Edmonton Rack 23.9 22.2 21.4 21.5 21.9 22.4 22.9 22.3 21.0 20.5 22.9 24.5 22.0 22.6 22.8 24.3 24.5 22.6 20.3 24.7 21.1 20.1 22.1 16.1 22.1 22.9 23.9 21.0 23.8 23.8 24.0 18.6 20.0 24.8 22.2 24.4 21.8 20.1 23.5 21.3 19.6 24.7 21.0 23.1 25.7 25.1 21.2 22.5 19.3 23.3 23.2 23.7 19.0 25.3 20.8 22.8 20.8 22.1 19.0 21.1 25.9 22.0 22.9 19.1 21.5 23.9 23.0 20.0 17.3 20.4 19.6 21.7 21.1 21.5 23.1 23.6 21.7 21.3 21.9 23.2 24.0 21.7 18.5 20.5 18.6 21.9 21.7 24.7 23.1 23.4 20.4 23.7 22.1 23.1 18.8 22.7 22.5 20.5 21.6 25.9 20.9 19.1 21.2 22.2 23.4 25.5 23.7 21.9 24.1 23.6 22.7 22.0 18.6 19.6 23.7 22.3 22.5 17.2 21.1 22.2 24.7 22.9 23.3 23.9 19.9 21.5 23.3 24.8 21.1 23.3 23.9 21.8 22.5 Canada avg rack 22.0 24.4 21.5 22.8 20.4 22.8 20.6 20.4 24.2 20.7 21.1 20.6 23.8 Vancouver Victoria rack rack 24.8 23.7 24.7 22.6 21.5 19.7 21.3 22.1 21.0 20.7 24.2 24.9 22.5 23.4 21.1 22.6 22.0 22.0 23.7 22.6 22.2 22.4 18.9 21.3 21.6 21.4 21.0 21.3 18.4 21.2 23.7 23.6 20.0 22.2 22.3 24.5 24.7 21.2 21.8 19.7 22.9 22.8 24.8 23.9 23.9 22.5 20.9 21.1 21.4 24.7 23.6 21.0 24.6 21.7 17.4 21.6 23.2 23.2 22.1 16.3 23.9 19.3 17.4 22.5 21.2 22.9 18.2 21.2 22.9 22.6 23.6 19.2 20.3 23.0 24.2 19.9 22.Table F: Rack Prices .3 20.7 23.5 19.5 21.9 19.3 20.3 17.6 25.8 21.5 24.1 17.4 23.9 24.

890 2.40 58.60 50.72 63.516.400 142.949 1.11 58.300 578.508 2.009 54.770 2.614 3.50 56.25 57.00 57.628 702.10 52.671 399.89 60.712 1.30 57.220 389.90 63.20 61.10 53.00 67.85 48.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.298 576.895 600.10 63.10 59.834 71.60 49.686 273.87 61.972 429.983 1.53 61.030.246 2.704.19 49.529 123.02 51.30 68.859 240.48 56.850 126.32 51.971 473.40 61.483 2.832 91.249.173 568.796 529.554 2.120 570.Table G: Study Market Data .60 70.796 2.72 58.014 3.17 Diesel 64.935 758.145.196 669.30 54.89 65.88 64.20 59.268 478.905 183.19 52.45 63.30 52.26 63.460 833.018 2.597 2.702 333.903 33.102 98.420.669 203.16 59.060.36 54.18 51.370 41.45 53.35 73.66 50.00 48.03 58.166 102.811 120.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.702.557.90 67.90 62.40 54.678.475 1.192 2.22 59.30 66.549 111.000 63.40 63.42 53.238 2.377 30.30 63.018.70 55.056. MJ ERVIN & ASSOCIATES 96 .687 1.933 25.543 2.28 65.858.101 447.174.620.98 59.636.250 748.234 799.997 397.26 44.204.296 179.72 74.30 54.837 329.922 103.97 51.150 48.07 61.00 66.50 56.73 65. and All Study Markets are weighted (by market population) averages.23 53.500 378.13 58.40 59.052 84.093.65 54.211 15.101 256.20 54.00 57.749 91.241 451.80 64.000 1.141.97 63.745.698 Note: Regional.245 351.85 54.60 60.194.483 63.412 722.985 636.78 67.058 2.214 248.830 2.897 350.92 51.24 61.53 48.414 450.438 591.74 57.980 120.513 19.894 1.88 54.23 63.621 102.749 243.113 2.000 217.00 62.86 56.119 632.38 56.26 49.332 101.20 58.20 60.643 184.945.153 316.334.89 61.50 55.93 63.790 185. Urban.94 55.810.000 1.70 49.83 68.625 64.448.55 58.34 63.

33 22.88 22.82 21.64 28.15 24.21 27.30 29.47 20.59 24.33 22.37 27.36 26.43 20.45 20.99 28.73 26.34 26.23 24.20 27.55 28.25 28.93 23.96 24.63 26. Tax (by Grade) Rack Pt.33 21.59 22. Urban.34 25.26 27.54 28.45 28.20 20.51 25.88 22.39 22.43 21.90 26.49 31.01 22.84 28.09 27.43 20.03 24.58 25.99 26.78 Product taxes Midgrade Regular 26.45 24.42 24.18 25.84 28.41 27.55 28.76 25.08 23.09 24.42 25.25 31.65 21.25 27.45 20.75 27.47 28.98 25.15 20.57 29.43 21.03 20.89 29.85 28.27 20.01 28.98 28.95 Premium 26.93 27.81 25.07 24.33 21.49 25.57 22.89 26.08 25.Rack Price.63 20.33 21.63 24.45 20.26 28.36 24.89 28.17 20.51 20.51 25. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.83 22.88 28.16 22.35 25.95 22.31 22.07 26.59 22.45 25.39 21.34 20.23 23.83 25.97 22.73 32.83 24.04 26.69 23.83 24.28 22.42 24.76 24.07 24.59 28.63 21.38 24.59 28.28 23.87 26.91 21.56 22.68 Diesel 36.88 20.74 21.23 26. and All Study Markets are weighted (by market population) averages.03 21.41 22.39 Note: Regional.39 21.51 31.95 22.04 24.49 21.43 28.82 28.Table H: Study Market Data .81 28.63 25.92 30.89 25.81 27.15 27.33 22.96 24.96 22.07 26.65 26.39 22.32 33.50 25.16 29.45 24.33 21.92 22.27 29.11 26.45 29.69 27.88 20.15 29.38 24.45 22.83 23.45 20.23 25.47 27.59 28.16 21.49 21.75 22.02 23.07 24.13 23.88 28.42 27.95 25.81 21.63 28.45 29.33 27.18 28.40 25.48 25.97 25.92 21.21 27.83 24.97 23.50 20.65 27.32 21.45 23.94 23.06 28.92 20.40 27. MJ ERVIN & ASSOCIATES 97 .53 23.25 24.93 23.33 21.90 27.

44 25.71 33.18 7.35 60.41 7.33 .29 24.31 0.03 7.95 21.35 58. Urban.88 31.60 7.01 31.36 20.19 5.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.80 1.44 33.13 28.51 11.Table J: Study Market Data .033 0.06 0.38 28.53 22.76 5.86 49.26 5. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.21 8.30 5.34 0.54 50.22 14.50 10.85 21.94 22.08 0.57 12. Average Deviation is the average deviation of the market values from their mean (average) value.63 58.30 12.72 26.53 21.04 0.01 0.62 56.98 0.06 5.58 66.50 0.17 11.42 2.24 23.91 0.75 28.28 56.45 1.91 2. Variance uses the formula [n∑x2 .80 9.53 6.88 5.35 27.07 30.31 23.82 32.18 55.Blended Prices.12 6.06 28. and All Study Markets are weighted (by market population) averages.04 23.02 0.94 17.79 33. Costs.96 3.77 37.60 23.16 3.44 56.83 1.26 27.27 6.64 3.33 9.84 28.08 17.00 0.31 28.81 26.98 1.89 21.38 7.92 22.02 13.12 23.16 20.26 3.34 1.23 38.68 2.23 7.77 5.86 28.47 0.78 2.98 0.28 1.99 0.13 11.81 28.35 28.59 4.04 28.96 28.83 27.16 54.82 95 Retail Gross Product Margin 6.20 5.97 0.08 55.68 7.70 22.73 1.00 22.17 9.56 24.98 31.91 22.96 27.04 22.85 24.52 5.68 7.02 22.22 1.45 6.85 26.14 60.25 1.27 60.38 22.83 12.28 1.22 5.28 27.41 12.15 66.31 34.21 8.05 6.66 28.24 7.11 31.58 1.95 6.64 1.43 23.84 5.83 36.64 3.82 3.90 59.49 2.39 56.38 2.99 2.63 60.29 8.00 4.27 62. MJ ERVIN & ASSOCIATES 98 .64 2.89 28.21 24.20 14.17 1.93 22.10 6.77 30.60 14.73 2.00 58.48 7.73 22.29 7.13 0.50 3.27 11.47 58.90 23.11 26.10 3.52 30.18 21.85 11.49 57.24 7.94 Note: Regional.83 21.91 29.07 0.02 3.41 29.17 26.36 0.75 23.56 4.43 0.38 0.73 10.07 0.32 31.08 3.37 26.14 7.50 58.(∑x)2 ]/n2.03 28.93 56.79 0.89 0.96 25.

875 $ 255.144 2.934 3.716 Note: Regional.246 $ 118.209 $ 82.794 3.157.688 $ 85.911) $ (166.550 $ 177.766) $ (274.564 $ 252.241) $ (227.394.095. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.223.010 1.510 $ 60.098.913 $ 139. For 95 net retail petroleum revenue.014.289 981.658.632 $ 256.375) $ (49.572) $ (286.066 3.885.004.719 3.208) $ (226.478 4.542 $ 222.089.557) $ 102.626 $ 81. Outlet Costs.265. but for ancillary revenue.900 $ 179.800 $ 225.995 $ 234.544 $ 175.000 2. these averages are based on all applicable study markets.224 $ 189.746 $ (374.481 $ 96.622 $ 174.677 $ 180.011.623 2.143) $ (249.956) $ 200.247 4.263 $ 60. Urban.648 3.467 $ 96.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.129 $ 97.966 3.074 $ 131. outlet costs.750 $ 271. and consolidated outlet income these averages are based only on those markets with available data.707 $ 260.646) $ (98.032 $ 77.856 3.604.429 $ 238.209 $ 26.120 $ 54.Table K: Study Market Data .805.Sales.197.117 $ 207.013 $ 227.465.520 5.102 $ 223.058.780 $ 85.526 $ 207.550 694.542.068 3. and All Study Markets are weighted (by market population) averages.067 $ 92.295 $ 174.772.638 2.244 95 net retail Ancillary Revenue petroleum revenue $ 208.272 $ 210.000) $ (241.694 3.302 $ 69.866) $ (244.250.098 $ (320.827.367) $ (164.837 $ 56.023 $ (15.502 $ (80) $ 60.640 4.000 $ 156.630 3.993 $ 113.135 $ 199.852) $ 119.900 2.890.779 $ 121.332) $ (238.272 $ 118.279 $ 154.948 3. Revenue. MJ ERVIN & ASSOCIATES 99 .871) $ (128.071.217 2.855 $ 278.081 $ 222.

21 0.53 10 6.658 3.22 3.41 0.76 18 5.08 16 3.48 7 7.42 5 14.095 3.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.790 1.06 1 5.145 81.33 0.91 17 4.970 330.55 19 11.550 1.85 15 11.715 14.98 6.845 15.88 12 7.13 2 11. N refers to study sample size (total = 481). of Brands No.465 694 3.605 16. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.20 17 14.24 0.73 5 10.29 1.01 7 2.542.50 3 10.40 9 4.73 14.223 3.38 0.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.275.40 1 3.745 16.41 1.098 4.071 2.157 2.29 8 7.47 14 3.30 0.827 3. of Outlets No. rank* 3.23 8 31.180 616.36 5.20 0.08 3.675 179.51 9 11.06 5.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.870 120.04 15 4.28 17.004 3.000 pop’n No.98 7.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.27 1.97 8.014 5.975 2.08 4 2.89 7.79 6.089 3.604 3.475 3. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.90 13 4.84 12 5.89 2 4.23 6 7.60 11 7.315 710.250 981 2.310 1.43 12.88 11 8.265 2.52 13 5.394 2.50 9.22 0.80 10 4.45 0.60 3.95 3 9.400 74.96 5.27 0.Table L: Study Market Data .45 14.91 12.00 11.10 3.54 6 2.50 8. inverse ranking is used (lowest value = 1).30 1.585 6.47 7.058 1.68 4 7.06 16 4.Demographic Profiles Population pop’n 299 .775 678.17 19 9. MJ ERVIN & ASSOCIATES 100 .775.02 0.

and in doing so. safety and business issues. cardlock.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. aviation and lubricants marketing channels. Contact: Michael J.14th Street NW Calgary AB. bulk. Ervin. Contact: Cindy Christopher. Petroleum Products Address: 235 Queen Street. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . They work with major oil companies in benchmarking performance in the retail. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. Ottawa ON. The SCF is the basis for this study. accessible through a public fax-back dial-in system. Senior Advisor. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). 119 . Principal Address: #400.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. Ottawa ON. generate jobs and growth. They maintain a large database of historical prices at most major centres. health. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. Ottawa ON. Vice President Public Affairs Address: 275 Slater Street. Contact: Maureen Monaghan Address: 580 Booth Street. a series of studies whose goal is to strengthen Canada’s competitiveness. and provide background resources to industry public affairs managers and the media. Contact: Brendan Hawley.

6th Ave. no 45-004) is a useful source of supply and demand volume data. Supervisor.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Managing Editor Address: Suite 2450. Contact: Robert Curran. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. Contact: Gerard O’Connor. 101 . Executive Director Address: 214. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 . Octane is published quarterly. 311 .6th Avenue.Octane Magazine Octane is Canada’s refining and marketing trade journal. Energy Section Address: Statistics Canada. SW Calgary.ab. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry. Calgary AB. Contact: Len Bradley. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. Ottawa ON. Its monthly publication “Refined Petroleum Products” (cat. and is a useful “window” on this industry.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures.

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